Watch out for these red flags.
As a venture capital firm, we see thousands of entrepreneurs pitch us their visionary ideas through sleek slide decks and engaging presentations, the result of hundreds of hours of research, preparation, and execution. At the same time, however, we see startup after startup falling into similar patterns surrounding a lack of product/market fit, the wrong team, the lack of a business model, or a host of other factors that indicate the startup’s eventual failure. After evaluating thousands of startups based on their product, team, and traction, we’ve taken this opportunity to go through the top ten reasons why startups fail (startups in this CB Insights research study cited more than one factor for their failure). Through this, you’ll be able to navigate these choppy waters and be prepared to handle similar challenges that come your way.
1. Lack of market need (42%): Overwhelmingly the top reason startups go out of business, 42% of startups identified that a lack of market demand prevented them from gaining the traction they needed to survive. When thinking about your own product, consider this: are you truly solving a widespread pain point and do people really need what you’re offering? Is your product a vitamin, something that is nice to have but doesn’t necessarily solve a major problem? Or is your product a painkiller, an absolute necessity that targets the pain point directly?
2. Lack of cash (29%): Many startups run into problems when they have insufficient funds to cover their operations, resulting in a short runway. An equally opposite scenario is also possible, where a startup receives too much funding and misallocates the cash or spends it too quickly.
3. Wrong team (23%): Having a cohesive group of highly motivated, persistent, and diversely skilled people is crucial for startup success, since 23% of startups cited an inadequate team as a contributing factor to their failure. It’s important that the team be united around a common vision and has agreed upon the startup’s long-term goals, so that everyone remains on the same page as the startup grows.
4. Too much competition (19%): When you build a better product than existing offerings, it’s likely that large companies or new startups will enter the space and chip away at your market share. Though having this first-mover advantage can be very beneficial, a second-mover advantage allows new competitors to quickly capture market share in a market that you helped validate.
5. Pricing issues (18%): Figuring out how to price is always a challenge, but for 18% of startups, it was a reason they failed. For startups, it is a constant compromising act between pricing high enough to maintain healthy margins and cover operating costs, while also needing to price low enough to entice customers.
6. Poor product (17%): For a wide variety of reasons, founders sometimes release products that don’t fully appeal to customers, which was the case for 17% of startups that shut down because of a user un-friendly product. As a result, it’s imperative that founders fully understand their target consumer, the problem or pain point they’re trying to solve, and how their product helps to solve the problem.
7. Business model (17%): Lacking a monetization strategy, only focusing on single channel, failing to find ways to scale, and other business model issues resulted in the failure of 17% of all startups. Without a sound business model, VCs are likely to question if they will ever see a return on their investment, even if the startup has a great product or traction.
8. Ineffective marketing (14%): Many founders are passionate believers in the product they are building, only to forget that if the target audience isn’t aware of the product’s existence, the company won’t succeed. In the case of 14% of startups, a lack of marketing, or not understanding fast enough how to get one’s product into the hands of the target market, resulted in the startup’s downfall.
9. Not customer-centric (14%): Bill Gates is known to have said that “your most unhappy customers are your greatest source of learning,” but unfortunately, many startups fail to obtain customer feedback and act on it. Instead of constantly testing, tweaking, and adapting the product to fit their customers’ needs, some founders fall into the trap of building a product for themselves, not the user.
10. Poor timing (13%): In his renowned TED Talk, Bill Gross, the founder of Idealab (an incubator that has hosted over 100 companies), identified the five main factors that he believed were essential for startup success. Using hundreds of case studies, he concluded that timing was the number one factor that determined if a startup would be successful, accounting for 42% of the difference between successes and failures. For example, Gross says that Airbnb’s success can be attributed to its impeccable timing, as it “came out right during the height of the recession when people really needed extra money, and that maybe helped people overcome their objection to renting out their own home to a stranger.”
As is often the case, a startup will experience several of the challenges presented above that will force the founders to walk a razor-thin line between staying open and having to shut the company down. However, for current founders and aspiring entrepreneurs alike, being aware of the challenges and pitfalls that startups have historically faced is the best way of ensuring that you’ll do things differently, that you’ll do them better.
Written by Anjali Agarwal, Junior Associate at Quake Capital
