Why do Startups Fail?
India is currently the third-largest startup ecosystem in the world and is home to 21 unicorns valued at $73.2 billion, but even after these thousands of success stories there are a lot more failure and learning stories. According to the IBM Institute for Business Value survey in collaboration with Oxford Economics, a key revelation was that the lack of pioneering innovation is the major reason for the failure of an Indian startup. As mentioned, “Despite India’s entrepreneurial strength, as many as 90% of startups fail within the first five years.”
Major roadblocks described by the report are:
70% of venture capitalists believe that startups fail because they fail to hire the right kind of people. As stated in the IBM report, 80% of engineering graduates in India are deemed unemployable and 48% of employers in India face difficulty in filling vacancies.
65% believe that funding is one of the major challenges for these companies.Lack of adequate mentoring, poor business ethics and inexperienced leadership were cited as other major reasons for the failure.
45% of Indian venture capitalists assert that the presence of proven leaders is an essential ingredient in their willingness to invest in startups, and 42% say that an ability to bounce back from failure is critical. However, 53% of venture capitalists indicate that inexperienced leadership is a key reason for startup failures in India. Economic implications of this mismatch can be significant, with venture capitalists often passing up investment opportunities due to a lack of credible management.
Here are the below 5 main reasons for the failure of startups
A major reason why companies fail is that they run into the problem of there being little or no market for the product that they have built.
Fortune reported the “top reason” that startups fail: “They make products no one wants.” A careful survey of failed startups determined that 42% of them identified the “lack of a market need for their product” as the single biggest reason for their failure.
Running out of cash
Running out of cash is probably the most common reason for a startup failure. There can be hundreds of reasons as to why they run out of cash.
Even if a start-up has meticulously managed its expenses and only spent on essentials – if it runs out of funding and there’s no future funding/revenue in sight – chances are it will fail. This is a prime example of why start-ups need to generate profit from Day 1.
Business Model Failure
Generally Founders are too optimistic about how easy it will be to acquire customers. They assume that because they will build an interesting website, product, or service, that customers will beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV).
The observation that you have to be able to acquire your customers for less money than they will generate in value over the lifetime of your relationship with them is stunningly obvious. Yet despite that, a vast majority of entrepreneurs fail to pay adequate attention to figuring out a realistic cost of customer acquisition.
Inefficient Founding Team
It’s not always the external factors that result in failure but there are crucial internal dynamics as well like lack of co-founders/core team coordination.
Every startup is backed by a team of people. The more versatile that team, the better chance they have of succeeding. Versatility in the startup environment involves much more than someone’s skill set. It involves mindset. Startup teams must possess the ability to change products, adjust to different compensation plans, take up a new marketing approach, shift industries, rebrand the business, or even tear down a business and start all over again.
Furthermore, startups with co-founders have a higher success rate than companies with a single founder. Having a cofounder creates a partnership. There’s much more accountability, which helps you to avoid some of the pitfalls of a single charismatic leader. Plus, a cofounder will have skills that you don’t have, adding on to the success of your startup.
The best start-ups are built on a strong management ladder that understands the business, appreciates the challenges, and follows a solution-driven approach to business.
The chances of your venture getting outcompeted by the others in the market is very high. Competitors that are also playing in the same field as yours will not give up easily. A combination of factors such as expertise, product and funding can lead to one startup’s success and the other’s loss.
Understanding and appreciating these reasons of failure is crucial, especially for first time entrepreneurs who are looking to dip their feet in this vibrant ecosystem.
We here at Convanto also help small, medium and large enterprises to raise capital, find their product-market fit and implement a successful go-to-market and branding strategy.
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