Learning from Failure: Top 7 Reasons Why Startups Don’t Make it

27 Jun 2022 | Business & Strategy

About the author

Hooshang Bakht

Brego Business was started with a mission to make entrepreneurship easy. Our goal is to help business owners grow and scale without having to deal with the day-to-day stress of running a business. We specialize in providing services that help business owners grow their businesses, including search engine marketing (SEM), social media marketing (SMM), LinkedIn marketing, video production, accounts receivable (AR), accounts payable (AP), internal audit, VCFO, and recruitment. We have helped more than 500 brands grow their businesses. We work closely with the clients to understand their unique needs and develop customized strategies that deliver measurable results.

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Top 7 Reasons Why Startups Fail?

Reaching the $1 Billion valuations is the dream of every business. However, the journey to reach unicorn status is harder than said, especially if a non-funded startup covers it. According to a report, 1 in every 5 million non-funded startups gets unicorn status. While every business chases the mark of $1 billion, they either fail or quit the journey midway.

India has currently the third-largest startup ecosystem in the world, with 21 unicorns valued at $73.2 billion, yet 80-90% of startups fail during the first five years of being opened. Wondering why startups fail? There are various reasons why startups fail, including market problems, poor team management, lack of funds, and cash flow issues. In fact, poor cash flow and insufficient funds

Why do startups fail? Besides market problems and poor team management, there are many other reasons that contribute to startup failures, such as poor cash flow and lack of funds. Startup failure due to competition is most likely to happen when the startup remains in the competition for three to five years.

In this post, we will elaborate on some possible reasons why do startups fail. Let’s dig deep into the subject and do a pre-failure post-mortem.

Misinterpreting The Market Demand

One of the common reasons for misinterpreting the market demand is our firm belief in statistics. The numbers cannot be right all the time. If you want to succeed in any industry,  well-thought market research is a must.

With Big Data and many other data analytics tools, it has become easy to get meaningful insights to make key business decisions.

According to SBA, “the startup failure rate is almost the same across all industries and so the reason why startups fail.” The research shows, “42% of startups fail during the two and five years of being started, due to misinterpreting the market demand”. 

Not Having An Innovative Business Model

The second most common reason startups fail is that entrepreneurs become too optimistic about acquiring customers and accomplishing their organizational goals. Well, assumption takes no money but overdoing it can be harmful. When preparing a business model for your startup, ask yourself;

  • How would you find customers?
  • Can you generate revenue from customers higher than the cost of customer acquisition?

You can do a CAC/LTV analysis to simplify the process. It shows you the cost of acquiring a customer and the lifetime value of a customer based on how l0ng the customer stays with you.

[Note: The cost of acquiring a customer must be less than LTV*]

67% of startups fail due to huge inefficiency in the capital. If you want to be in the rest of 33%, aim to recover the CAC in less than 12 months.

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Lack Of Skills Or Leadership Gaps

Having a diverse team with different skill sets has always been crucial to organizational success, and it’s especially important to why startups fail.According to Small Business Trends, 82% of successful business owners admitted that their success lies in a qualified and experienced team.

Hire these eight key people carefully to avoid counting yourself among the “23% of startups cited team issues leading to failure.”

  • Chief Executive Officer
  • Product Manager
  • Chief Technology Officer
  • Chief Marketing Officer
  • Sales Manager
  • Chief Financial Officer
  • Business Development Manager
  • Customer Service Representative

Lack Of Capitals Or Poor Revenue Management

The reasons why startups fail are numerous, but one of the most crucial ones is poor revenue management. While external funding can give a startup a boost, managing revenue and funds effectively is what really drives success.

One of the top reasons why startups fail is poor cash flow management. Many startups secure enough seed capital, but their inability to manage revenue or raise follow-on funds is often their undoing. Reid & Taylor, a well-known custom tailoring brand, is a prime example of this. The company’s failure to pay back loans ultimately led to its closure, as it could not sustain operations.

From this failure, there are several lessons that startups can learn. Firstly, it is essential to have an effective business and revenue management model in place. Additionally, startups should focus on revenue and profits alongside their products and services from the outset. Finally, it is important to spend funds judiciously to ensure long-term success.

At Brego Business Digital Marketing Services, we understand the challenges that startups face, including poor revenue management. That’s why we offer comprehensive business consulting services to help startups overcome these obstacles and achieve their business goals. Contact us today to learn more about how we can help your startup succeed.

Having A Poor Pricing Strategy

Pricing plays a pivotal role in early-stage startups, and it is one of the major reasons why startups fail. It can either make or break your business. However, determining prices for a startup comes with its own challenges, especially for consumers in the Indian market.

The science of pricing requires understanding your competitor’s cost and market demand. It allows businesses to set a good margin based on customers’ perception of value and keep the prices in line with competitors.

Try with both buyer perspective and your value metric in the initial stage of your startup and once you figure out the market, you can start optimizing your pricing strategy.

Outdated Or Poor Marketing Strategy

Branding matters, and failing to adapt to changing marketing trends has always been one of the main reasons why startups fail. Even if you have a unique product or come from a recognized brand, personalized marketing is essential for startup success, as highlighted by Startupbasics. 

Let’s take a fresh example from Tata Nano. The car was indeed an innovation, it failed to set up as a brand, due to poor marketing strategy. While it comes from a brand like TATA, the manufacturers marketed it as “Cheapest Car Of The Nation” which somewhere poses a negative impact.

Failing to adapt to changing marketing trends has always been a significant factor in why startups fail. As a startup, you don’t primarily need a PR team, but you must have an outstanding marketing team capable of creating a buzz about your products or services on social media or among the online audience.

Founders Give Up

Most often than not, the reason behind why start-ups fail is that the founder steps down. The founders give up because they don’t have money, energy, or enough power to convince investors to keep the start-up alive. According to a report, the main reasons why startups fail include a lack of market need, running out of cash, and not having the right team. Interestingly, failures have a 20% chance of success, while first-time founders have only an 18% chance of success. Hopefully, this post has given you better insights into why startups fail and helped you learn things to avoid for a successful start-up. In the end, we can only say that ups and downs are part of business, but you should never stop trying.

Also Read: 6-Biggest Mistakes You As A First-Time Founder Should Avoid

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Frequently asked questions

Why do startups fail?

Startups can fail for a variety of reasons, including lack of product-market fit, insufficient funding, poor management, and intense competition.

What is product-market fit, and why is it important?

Product-market fit is the degree to which a product satisfies the needs of a particular market. It is important because without it, startups may struggle to attract and retain customers.

How can startups avoid failing due to lack of product-market fit?

Startups can avoid failing due to lack of product-market fit by conducting thorough market research, gathering feedback from potential customers, and testing their product with a small group of early adopters.

How can startups secure funding to avoid failure?

Startups can secure funding by seeking investment from angel investors, venture capital firms, or crowdfunding platforms. It is important to have a solid business plan and a well-articulated value proposition to attract potential investors.

How important is leadership in determining a startup's success?

Leadership is critical in determining a startup's success because strong leadership can inspire and motivate the team, make strategic decisions, and adapt to changing circumstances.

What are some common mistakes that startups make that lead to failure?

Common mistakes that startups make include overestimating the demand for their product, underestimating competition, failing to differentiate from competitors, and mismanaging funds.

What are some indicators that a startup may be in trouble?

Indicators that a startup may be in trouble include declining revenue, low customer engagement, high customer churn rates, and a lack of investor interest.

How important is market timing in determining a startup's success?

Market timing is crucial in determining a startup's success because entering a market too early or too late can significantly impact the product's success.

How can startups adapt to changing market conditions to avoid failure?

Startups can adapt to changing market conditions by staying up to date on industry trends, conducting regular market research, and being open to pivoting their business model or product offering.

Can failed startups recover and become successful?

While the odds are against failed startups, some may recover and become successful. It often requires a significant pivot, strong leadership, and a willingness to learn from past mistakes.

Starting a business is not an easy task, and unfortunately, many startups fail within the first few years due to various reasons why startups fail. At Brego Business Digital Marketing Services, we understand these challenges and provide expert guidance to help startups overcome these obstacles and achieve success.

Our experienced team provides comprehensive business consulting services that address these and other common reasons why startups fail. We help our clients develop effective marketing strategies, including digital marketing campaigns, to increase their brand visibility, reach their target audience, and drive sales. Additionally, we provide financial management consulting to help startups optimize their financial resources and achieve long-term financial sustainability. If you're a startup entrepreneur looking for expert guidance and support, Brego Business Digital Marketing Services is here to help. Contact us today to learn more about how we can help you overcome the reasons why startups fail and achieve success.
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