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Every one of us has that friend, who aspires to launch a start-up, with dreams of becoming the next Elon Musk. However, the harsh reality is, most of the startups fail. The common number of the startup world would always point out that only one in every five million non-funded startups attains the unicorn status.
And when it comes to funded startups, one in ten thousand becomes a unicorn. Have you ever thought about why most startups fail? And why some startups succeed and others fail?
In order to help you know the real reasons why many startups fail we have curated a list of Top 6 reasons why startups fail, which will give you a bit of insight regarding the issue.
Good Idea, Bad Business
When asked why startups fail, the most common answers point out a very weak business model. Its simple economics, no matter how good your idea is, your business will fail if you can’t make it profitable or scalable. If the founder or the co-founder lacks the skills or abilities that are needed to get the company going, then he/she must identify those lacking skills and should gain the knowledge in order to get an upper hand against the competitors.
Not Understanding the Market
One of the main reasons why startups fail is hidden behind the founders’ belief that their product is so unique that the market will beg for their products and cash will start to flow from every direction. Some of them don’t even understand the capabilities of their product- especially in their early stages.
That is the reason we witness, companies change their product line up just to satisfy the market and to stay in business. However, if these startups could at least test their product and understand the market before the launch, then the failure and market rejection risk will go down significantly.
When the Market is Not Ready
If you ask me why startups fail so frequently? I would say many a time we have seen companies launching their products even before the market is ready, or even when the technology is not there yet whilst some of the companies are too late to jump on the bandwagon.
In situations like these, the key factor is always to question yourself, when the sales are not taking off. You are the one, who can eventually decide when is the best time to stop a loss and change the direction of the company or if it needs some more time, investment, and efforts to start making profits.
Criticism is a Good Thing
If you ask me why startups fail? I would say many of the founders are often reluctant to let others test their prototypes until it is reasonably ready. However, most startups fail just because their founders or leaders are reluctant to get feedback from potential customers. If you are not listening to your customers, then you’ll never know what they want and your company is destined to fail.
So, don’t be afraid of someone stealing your idea or showcasing a half-baked, crude prototype, which has too many imperfections. If you make a few of those prototypes, that are far from perfect and have them tested, then it’ll put you in a product improvement and learning loop that will be repeated until the product sees demand from the potential clients.
A Startup Must Avoid Cash Burn
While answering about why startups fail many blame the founders’ lack of knowledge when it comes to leading an organization. So, they always try to build the perfect product and launch only after that. However, it can be a major problem, when you need to grab all the cashing opportunities that come your way just to keep the business running.
In order to prevent the cash burn, you should identify the areas from where you might end up burning cash. The more your company sees situations like high payroll costs, low-profit margin, delay in payments, and small recurring purchases, the more your company is stretching its treasury. So, always try to spend on essentials rather than spending extravagant amounts on unnecessary items during this phase.
Raising Capital is the Need of the Hour
Raising capital is one of the most important parts of any startup and few times it becomes one of the top reasons why startups fail. Most of the young entrepreneurs don’t have a clue about how many rejections they might face before they succeed to raise any kind of capital. Most of the time the founders start this process too late and they go with the wrong group of investors.
The more you are in the market for the process of fund-raising, the more you know, what you want as a company and what the investors want from you. So, a committee of few, who know a thing or two regarding fund-raising, might help you in the long run.
At last, I can only say premature scaling up a company, being a one-man army, and obviously, lack of focus often leads to failure of a promising startup. If you are able to prevent these mistakes, then you’ll be setting yourself up for a major success story.