7 Cringeworthy Reasons Why Startups Fail (+Real Examples)

As founders or entrepreneurs, it is fair to say we are an optimistic bunch. 

Despite the odds, we like to look at the upside of starting a business. 

That causes us to leap into the unknown, when coasting in the comfort of a day job can seem like the more logical option. 

This is amplified by the media echoing success stories that hail our startup heroes on a daily basis. 

Instagram gets bought for $1 billion dollar in 500 days. 

Uber is valued at $US18 billion in June and operates in 128 cities across 45 countries.

Dropbox has amassed a 50 million user figure and $240 million in revenue, despite barely existing a decade ago. 

But here’s a statistic you should know. 

According to the Startup Genome Project, 92% of startups fail within three years. 

Why am I telling you this? 

No, my intention is not to deter you from entrepreneurship. But rather to help you enter with both eyes open. 

By learning from the failures of others, hopefully you will…

Save years of gut wrenching mistakes…

Shorten your learning curve and…

Reach startup success faster. 

CB Insights did a research on the primary drivers of startup failure based on 101 startup post-mortems. 

Unsurprisingly, the big failure triggers boiled down to “No Market Need” (42%), Ran Out Of Cash” (29%) and “Not The Right Team” (23%). 

#1 Demanding Product Delivery

As a new company, manpower is in limited supply. 

And it needs to fulfil two needs: Building the product and acquiring customers. 

BitShuva is a radio software that serves underserved radio niches. 

It started off serving the the Messianic Jewish religious community. Then it received requests to set up radio platforms for other niches.

Nigerian music. West African soul. Egyptian Coptic chants. Indie artists. Instrumentals. Ethiopian pop. A marketplace for beats. Local bands from central Illinois. 

All these clients came out of the woodwork, asking him to build clones of his radio station for their communities.

It failed due to the adoption of customised product delivery. Clients continuously demanded bespoke specifications such as new features and bug fixes. 

Considering the heavy workload involved and lack of funds to hire additional manpower, it was a broken business model. 

Compare this with how Wordpress designs its product. 

It does not give its customers a customised platform, but engineers a customisable platform instead. 

Users have the flexibility to choose various themes and plugins according to their needs and preferences. 

Take a second to consider the difference - Customised vs Customisable

Customers are happy because they have the flexibility to alter the product according to their specific needs. 

Wordpress does not need to be involved with individual client and focus its resources on creating an automated platform instead. 

It becomes a win-win equation. 

 

TAKEAWAY: WHAT IS YOUR STRATEGY TO AUTOMATE THE DELIVERY OF YOUR PRODUCTS? 

 

#2 - Pitch Fails The 3 Seconds Test

Can you explain your product within three seconds? 

Unfortunately Amiloom collapsed because they failed in their pitch. 

Brief Background - Amiloom is a connected device that forms a network of people with common friends, shared tastes, and who only need to go as far as the device was handed to meet up with each other.

Below is their ‘how it works chart’: 

7.jpg

This required a 12 step explanation. And even then, it is unlikely that one would understand what the app is about. 

Compare it with the tag lines of these successful companies 

 

Coca Cola - Happiness In A Bottle

  Slack -  Be Less Busy

 

Slack -  Be Less Busy

  Youtube - Broadcast Yourself

 

Youtube - Broadcast Yourself

  Asana - Teamwork Without Email

 

Asana - Teamwork Without Email

You get the idea. Their value proposition is succinctly explained within one sentence. 

Simple to understand without the jargon. 

Why is this so important? 

The reason is because attention is scarce in the digital economy. 

You need to clearly articulate how you can benefit your target audience, or risk getting lost in the sea of ambiguity. 

 

TAKEAWAY: CAN YOUR BUSINESS EXPLAIN WHAT IT DOES IN THREE SECONDS? 

 

#3 No Market Demand

Building a product and seeking funding, without marketing validation. 

Sigh, this is the biggest reason why startups fail. 

In fact it makes up the bulk of the failure in the research by CB Insights covered earlier. 

A spectacular fail worth mentioning is Kolos.

Kolos is an iPad racing wheel project . 

Romanticised by the idea, Ivaylo Kalburdzhiev, a Bulgarian entrepreneur launched a Kickstarter campaign after investing three year in development. 

Prior to that, there was no market research or validation. 

This set the stage for an expensive failure. 

The Kolos team experienced a fail crowdsourcing campaign, which signalled that there wasn’t sufficient market demand for their products. 

Compare this with Buffer, the social media management app. 

During its infant stage, it test if people would pay for its concept via a minimum viable product (MVP). 

This comprised of sending paid traffic to a landing page. 

On the occasion when people opted in to enquire about pricing, they counted it as a conversion. 

This allows the Buffer team to optimise their marketing message before building the product. 

 

TAKEAWAY: ARE YOU TESTING FOR MARKET VALIDATION BEFORE INVESTING HEAVILY IN PRODUCTION? 

 

#4 Steep Operational Overheads

Company revenue can be deceptive. 

Even if the company is experiencing cashflow, heavy expenditure can tank the startup financially. 

One key example is Zirtual, a virtual assistant matchmaking service. 

At its peak it had 500 employees, served thousands of clients and was on a $11 million run rate.

All this sounds great on paper yet…

It’s burn rate was extremely high. 

The tipping point came when they moved from independent contractors to employees. 

With skyrocketing costs, they struggled to raise more money. 

Unfortunately they were unable to raise funding in time and got bought up by Startups.co

Here is some money saving tips from other entrepreneurs:

"Instead of renting an office, try finding a coworking space or working out of a coffee shop. It'll save you a huge amount of money."  

- Ben Lang, MapMe 

 

"The less you do, the better you will be at doing it. If you don't have the infrastructure to support a sales team or enough work for another employee, don't hire them. The fewer obligations you have, the faster you can pursue new opportunities."

- Lucas Sommer, Audimated

 

"Find monthly and short-term services to avoid getting into contracts and agreements that require capital you may not have. The more control you have over all your expenses, the better."

- Lisa Nicole Bell, Inspired Life Media 

 

"Bring on employees that have a high risk tolerance and are committed to keeping down costs. You need people that are willing to take lower salaries because they see the upside of getting a lot of equity in the company. All employees also need to be resourceful in stretching available resources."

- Ben Rubenstein, Yodle

 

TAKEAWAY: EVALUATE EXPENDITURE ON AREAS SUCH AS SPACES, FULL TIME STAFF AND EQUIPMENT. ARE YOU ABLE TO FREE UP FUNDS? 

 

#5 High Customer Acquisition Costs

 

Profitable Business: Revenue > Expenditure

This might seem like a simple equation, yet it can be more difficult to apply in actualbusiness circumstances. 

And that was the biggest reason why Homejoy failed. 

Homejoy was known as the Uber of home cleaning. 

Using logistics algorithm, it connects home owners with contract-for-hire cleaners. 

While this sounded like the smart use of the on-demand economy, there was one issue. 

High customer acquisition costs.  

It relied too heavily on daily deal sites like Groupon to draw in new customers. 

This immediately decreased its cashflow as consumers we accessing Homejoy cleanings for as little as $19.99. 

Unfortunately, discounted deals attracted the wrong type of customers. Their internal data showed that most of these people would never use the service again. 

Compare this with AirBnB’s referral program. 

As travel is a popular conversation topic, AirBnB uses referral marketing to acquire new customers at a dirt cheap rate. 

The offer was enticing: referrers would receive a $25 travel credit when new members took their first trip. 

New customers who were referred also received a $25 travel credit. This encouraged referrers to “help a friend out” rather than be perceived as selfishly accumulating travel credit. 

This arrangement was a win for the existing customers, their friends and Airbnb. Ultimately allowing the company to double its growth to $25 billion within a year. 

 

TAKEAWAY: HOW ARE YOU KEEP YOUR CUSTOMER ACQUISITION COSTS LOW? 

 

#6 Overly Focusing On Funding

 

“Incorporation comes with costs that you shouldn’t have. Focus on your customers and the problem you’re solving. Nothing else matters in the early days.”

Gil Sadis, Liscensaro

 

Yes raising funds might seem like a sexy idea, yet it might do little to move your business idea forward. 

That was what happened to Gil Sadis’s SaSS startup. 

On hindsight, he quit his day job too soon. This created massive financial pressure and forced him to look for funding. 

This naturally resulted in the dispersal of his time in talking to customers and building a product they actually wanted. 

Compare this with serial entrepreneur Jon Yongfook

He bootstrapped his company, starting off with no employees and zero revenue. 

The result is a heightened sense of resourcefulness and focus to get the business up and running. 

He cautions that raising funding is time consuming. 

 

“Every minute you spend talking to investors is a minute that you could be improving your product and delighting your customers. Realistically you'll need 50 meetings to get interest from 5 investors, which will result in 1 term sheet. If you're an early stage startup that has barely made its first dollar, I can't think of a more epic waste of time.” 

 

In addition, the lack of investors gives you the flexibility to pivot according to the market needs without reporting to anyone. 

“this will involve keeping investors in the loop about your progress and major business decisions. At the worst, this will involve more business overhead (meetings, futzing around in excel, getting sign off before you buy things), potential micromanagement or having to constantly justify your actions.” 

 

Lastly, seeking funding to scale after you find a product fit puts you in control of your business.

“They say the best conditions to raise funding are when you don't need it. If investors want to invest in your company when you're bootstrapped, profitable and growing - you have all the leverage. You can name your terms and walk away from the deal if you aren't happy. There will be other interested investors.” 

 

#7 Wrong Timing

There’s an old saying in startups: “being early is the same as being wrong.”And it’s true.

Dodgeball was a location-based social network. 

It allow people to find and meet up with friends within their proximity.

Unfortunately this was before smartphones and Facebook was invented. 

This meant that every communication happened through text messages, which was less user-friendly than live messenger. 

Without Facebook, people didn’t really understand why they would want continuous updates on what their friends were up to. 

Today, the concept Dodgeball has re-emerged as Foursquare. 

Powered by smartphones and Facebook, it is a runaway success. 

About the importance of timing for a startup’s success, simply watch this video by Bill Gross, serial entrepreneur. 

“Many business models that failed in the early 2000s are now incredibly successful because now, the timing is right, the technology is here, and it’s easier than ever before to achieve scale. 

As an example, my company SitePoint tried selling ebooks back in 2000 and no one bought into it. It was a complete and utter disaster and forced us to print and ship physical books—which sold like hotcakes. 

The reason is simple, people were still getting used to the idea of shopping online, and paying for digital goods was still a foreign concept to many. 

ast forward a few years, with the iTunes revolution, Kindle and iPad, and all of a sudden, ebook sales are trending sharply upward every year.”

- Matt Mickiewicz, Flippa and 99designs

TAKEAWAY: TAKE A STEP BACK TO INVESTIGATE THE MARKET TRENDS AND TECHNOLOGY AVAILABLE, IS YOUR STARTUP SLIGHTLY AHEAD OF THE CURVE? 

 

To Wrap It All Up

So there you have it.

Above are 7 common reasons why startups fail. 

To recap they are:

#1 Demanding Product Delivery

#2 Complicated Pitch

#3 No Market Demand

#4 Steep Operational Overheads

#5 High Customer Acquisition Costs

#6 Overly Focusing On Funding 

#7 Wrong Timing 

 

Are there any startup pitfalls you have witnessed first-hand? Feel free to share your thoughts in the comments below. 

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