Why Startups Fail? 6 Reasons and 3 Early Stage Signs

The startup ecosystem is at an all-time high with the number of unicorns increasing every year. 

But, like every coin has two sides, the ecosystem also houses failures. 

And, that is what we often don’t acknowledge. The number of startups that fail every year.

The startup failure rate is 90%.¹

In our journey through this blog, we will try to break down the factors why startups fail and what are some early signs of failure.

Why Do Startups Fail? 

A lot has been said about how startups succeed, and what is needed for their growth. 

However, considering that the number of startups failing is 9 times more than those succeeding, it is only fair that we address that. 

We are sharing 6 major reasons why your startup might fail. 

1. You’re Not Solving a Problem

Where most founders (especially first-time founders) go wrong is that they solve a problem no one is facing.

A good idea does not guarantee good business.

If people don’t pay for it, you don’t have a business but rather a hobby (an expensive one).

Look for a problem you or your peers are facing. See if the problem needs to be solved urgently. 

People will pay only if you solve a burning problem. At the same time, not every problem has to be solved for the end user. 

Tell us, what problem is your startup solving? 

2. You Possess a Lack of Market Understanding

A lack of market understanding leads to a poor Go-To-Market (GTM) strategy which can ultimately cause failure.

You need to know who your potential customers are, how they live, how they work, what they do, what problems they face, where they are looking for their solutions, and how big the problem is.

You need to know the market to hit product-market fit and develop a successful go-to-market strategy.

QnA platform, Frankly.me failed due to a lack of product-market fit and the grocery delivery platform PepperTap succumbed to a bad product.

Do you know who your target audience is? 

3. Poor Hiring Practices

Now, we don’t need to narrate the story of unity and its impact. 

Simply put, you can’t go a long way alone. So, it’s better to have a team that stands by your side, but it is not easy to build that team.

If you hire the wrong people, your downfall is certain.

Enron went from being the industry leader to filing bankruptcy due to the wrong people.

Hire great people, not great skills. Great people bring great value. 

Caution: While it is important to hire great people, it is equally important to hire at the right time and stage of your startup. 

4. Not Focusing on MVP

Fancy software and too many features don’t make a business big, rather they inhibit fast movement.

Focus on developing a minimum viable product (MVP).

Too many features at the initial stage spoil the quality, making the development hodgepodge, eventually leading to poor implementation of feedback. (just how too many cooks spoil the food).

Moreover, in the initial stage, you are not sure how the market will react to your product so you don’t want to unnecessarily bleed money.

An MVP just gets the job done.

Do you wish to connect job providers and job seekers?

An excel sheet with a chat group can be your MVP.

5. Implementing Bad Marketing Strategies

The biggest mistake entrepreneurs make is being overconfident about their products/services. 

Customers are NOT going to come on their own to use it. 

Nobody cares. 

Nobody cares about your product or better said, nobody knows about your product. You need to do good marketing to get the word out there.

Many first-time founders ignore marketing and never get a paying user. And, a few tech founders focus only on product development until it is time to leave the industry. 

Having a personal brand or an engaging community can do wonders for you.

It is always better to build an audience before building a product.

Caution: Don’t let your personal brand overpower your company brand. 

6. Not Tracking KPIs in Any Activity

As the name suggests, KPIs or Key Performance Indicators tell you what went right and what went wrong. They help you keep a track of your growth and performance.

More often than not, founders don’t track KPIs and when they do, they focus on the wrong KPIs which gives a false sense of growth.

Early Signs of Startup Failure

While startups don’t fail the second they are launched, they start showing early signs of failure.

Here are 3 signs you should look for to detect potential failure.

1. Zero Paying Users

There can be no better sign of failure than not having paying users for your product even after months have passed.

If you are offering a free trial or a demo to your product, focus on converting them to paid users after a couple of weeks. 

This will not only improve their experience with you but will play a role in keeping your startup afloat. 

2. Too Much Focus on Vanity Metrics

Do you find yourself getting all excited about likes and followers even when they have nothing to do with your revenue?

Well in that case you might be focusing on the wrong metrics (also known as vanity metrics).

(secret – we have a blog under process where we talk to founders to find out what are vanity metrics and how they track metrics for their startup. Don’t miss out)

Make sure you are looking at the right metrics and not fooling yourself.

3. Extremely Low Customer Engagement

Now when you are finally focusing on useful metrics, check if customer engagement is low, medium or high.

• If you have a UPI payment app, are there transactions being made by customers?

• If you have a medicine ordering app, are people actually buying anything?

Check whether your startup is fulfilling the need it is built for.

These are the signs you should look for to predict failure and then pivot to make things better.

Frequently asked questions

In Conclusion

Starting a startup is neither simple nor easy, in fact, it is a bit scary to build something from scratch.

While it’s okay for first or even second-time founders to be clueless, it’s not ok to remain clueless.

So stop being clueless and make your startup a success.

Citations:

¹ MoneyControl