Why do Startups fail? Reasons And How Entrepreneurs Can Avoid It
According to the Economic Survey 2021–22, India has developed into the third-largest startup ecosystem in the world, behind the US and China.
Major central banks had to open their liquidity taps due to the covid-19 epidemic that broke out in early 2020 and drove governments all over the world to impose limits on commerce and human travel to stop the spread of the contagious disease. Due to the excess liquidity in the financial system, investors flocked to nations like India, where they usually receive major returns on their investments.
Thus, since 2020, governmental and private market investments have increased in India. In December, VCCircle stated that all unicorns’ total amount of money raised in 2021 was above $12.7 billion.
Throughout the year, a large number of startups and unicorns, mainly cutting-edge technology businesses, were listed on stock exchanges. 75 IPOs raised 89,066 crores between April and November 2021, more than any other year in the last 10 years.
“More and more businesses are entering the market due to the listing fervour that led to massive oversubscriptions from retail, High Net Worth persons, institutional investors and great listing gains. The overwhelming interest shown by investors of all types in company IPOs was indicative of their trust in the economy as a whole and in the performance of the business sector, “based on the survey.
But the reality?
Even though India has the third-largest startup ecosystem in the world, 80–90% of enterprises there fail during the first five years of operation. You might wonder why businesses fail.
The following are reasons for startup failure and steps you may take to prevent them:
1. A lack of innovation
77 per cent of venture capitalists believe that Indian entrepreneurs lack originality or distinctive business models, according to a poll. A study by the IBM Institute found that 91% of organisations fail during their first five years as a result of a lack of innovation.
India doesn’t have any meta-level startups like the well-known Google, Facebook, and Twitter, despite having the third-largest startup environment in the world. Indian businesses are notorious for replicating successful foreign startups rather than creating their own.
According to a list of the fifty most innovative companies in the world, startups like ChaiPoint, Ola, and Swiggy would be some of the most innovative in India.
How can startups prevent this?
Businesses can benefit from innovation in many ways, including increased productivity, standing out from the crowd, and efficiently addressing challenges. Here are some things startups need to think about:
- Refrain from copying successful overseas startup concepts without first conducting market research in India.
- Before pursuing ideas that are popular, consider if they will be sustained over time.
- Track down the resources you need to support innovation at the startup.
2. Lack of funds
Tazzo, a company that rented bicycles, shut its doors in 2018. One of its fundraising partners attributed the problem to a poor product-market fit, which stopped the money flow. The lack of a good business model caused the company to close its doors despite having raised a sizeable amount of money.
There is a tonne of company ideas available. But to turn ideas into reality, you need money. Those who are successful in securing financing require profitable and scaleable business ideas to grow their firms. Lack of funding is one of the key reasons why startups fail.
Lack of capital is a significant barrier that drives many firms to fail. The inability to attract follow-on finance is one of the key reasons why firms with seed funding fail.
What are the main things to think about?
Startups must have sound business and revenue models, prioritise revenue and profit over products and services from the start, and carefully manage their financial resources.
3. Lack of focus
Bill Gates and Warren Buffet both cited focus as the key factor in their success when asked to select one. Let’s examine an example to show how focus can be advantageous.
A food delivery startup is called Grubhub. The business decided to limit its attention to meal delivery from the start. A startup of such type might provide a whole range of additional services, like food pick-up, catering, and others, but the owners decided to focus just on delivery. What is the outcome? They could successfully build the company through technical.
Here are some tips for startups to stay focused:
- Look for both positive and negative feedback.
- Don’t go overboard. Please make a choice, then give it all of your attention.
4. Product Market Fit
The simplest explanation for why many startups fail is that there is no market for their products. Does your product provide consumers value? Exists a market for your product?
Is your product in line with the innovative ideas that formed the foundation of your company? Startups frequently make hurried attempts to develop products that have no market or to expand the market for an already existing product.
How can you avoid this?
- Develop a thorough understanding of your target market’s characteristics and attitudes toward your offerings.
- Use word-of-mouth to attract new customers before investing in pricey marketing strategies.
- Develop a rapport with your customers.
- You cannot please everyone, nor should you try to.
5. Leadership gaps
The founders and core team members’ visions are what propel the majority of startups. The ability to lead a team, a company, and a brand are far more crucial than having a fantastic idea. Another frequent reason why startups fail is a lack of a clear vision and effective leadership.
The Harvard Business Review states, “An enduring organisation requires a system of leadership that is instituted very early in its history, while a principled founding team can create a great company.” While some entrepreneurs may naturally possess leadership skills, others may need to work on them.
How can you avoid this?
- Give the leadership responsibilities to someone else if you lack the necessary abilities.
- Learn about and put it into practice.
- To develop your leadership skills, choose a mentor.
6. Lack of agility
We now occupy a culture that is always linked, both at work and at home. It’s essential to always keep up with complexity and change. Agility can provide entrepreneurs with a competitive edge in such a culture.
Hindustan Unilever Limited, the largest consumer goods manufacturer in India, made the decision to collaborate with startups in 2015. You will be surprised to learn why they did it. They did it to restore their agility. The modification helped the company develop the flexibility and agility that characterise startups.
Various growing pains may arise for startups. Additionally, they have ongoing difficulties for which they need to find solutions. Since change is inescapable, startups must continue to be flexible and agile to advance.
Startups can ensure agility within the organisation by practising the following:
- Continuous learning
- Having a fluid workforce
- Research and development
- Be willing and open to letting your ideas change
7. Business model failure
Many business owners believe that having a quality product, a visually appealing website, and major advertising budgets will be sufficient to draw customers and business. They ignore the costs associated with client acquisition and customer retention and the necessity for a company to have a robust business strategy to survive and turn a profit.
To create a good business model, entrepreneurs might start by asking themselves the following two questions:
- Does your startup have a scalable method of customer acquisition? Could you locate one?
- Can you make money from those clients once you have them? Will the income from the customer exceed the cost incurred in acquiring that customer?
8. Lack of talent & competency
Unexpectedly, 23 per cent of startups fail because of a lack of people and expertise. One would think that it is one of the most readily fixable problems. Nevertheless, it isn’t. The reasons? It takes a lot of time and energy for businesses to find the best employees. In some cases, it may be difficult for startups to locate a better replacement for a problematic employee.
Startups frequently lack funding and cannot afford to engage expensively skilled or experienced workers.
What could startups do to tackle this problem?
- Carefully plan their hiring procedures.
- Develop alternate working strategies, like teaming up with knowledgeable people to complete projects on a freelance basis.
- By presenting candidates with a genuine problem to address, you may tighten up the hiring process.
9) Ignoring customers
Startup owners sometimes have too much on their plates, including managing the organisation’s finances, hiring new employees, etc. Customers might not even be on their lists of things to achieve. Entrepreneurs often overlook this severe issue, which may be the reason why startups fail.
According to a Harvard Business Review article, startups who are committed to being customer-centric find that making decisions is easy, that their focus is narrowed, and that word-of-mouth marketing enhances their appeal. Customers can assist startups in improving their goods and services because they know what they want.
What you should do is:
- Don’t ignore customers.
- Respond to customer questions, comments, and suggestions.
Article proofread & published by Gauri Malhotra.