Approximately 543,000 startups emerge all over the US every month. Out of this number, only 50% are expected to survive in the succeeding five years. It’s not an overstatement to note that nine out of 10 startups will eventually fail. Business is a numbers game that isn’t easy to crack. Here are the most common reasons why startups go down the drain shortly after they’ve made it to the surface.
1. Tough market: Offering nice-to-haves instead of must-haves
One of the top reasons why startups fail is that business founders often go in business thinking they’re the exception. The rules don’t necessarily apply to them because they have a brilliant idea that’s only waiting to be translated into a successful venture. They don’t conduct enough market research to support their ideals and claims. So when they finally put their product or service in the spotlight, reality suddenly hits them hard on the face. They have no market—no audience to validate their efforts. As you can imagine, it only spirals down from there.
Zirtual, a startup providing on-demand virtual assistants, cited lack of market demand as one of the reasons their venture failed. Zirtual differentiated itself by taking in full-time employees instead of hiring contractual workers. The company was overstaffed, and there just wasn’t enough demand for virtual assistants at that time. The numbers didn’t add up so CEO Maren Kate Donovan decided to lay off the company’s 400 employees in August 2015.
2. Ineffective business model: Coming short of professional insights
First-time entrepreneurs are naturally overconfident—and that’s okay. But when they let overconfidence overshadow sound business reason, that’s when it all crashes. When the fine line between overconfidence and arrogance blurs out, entrepreneurs may be at risk of becoming inflexible—and every businessman knows flexibility is among the few perks startups have over established companies. For a startup to be able to sustain itself for the next five years or so, its founders need to create an effective business model that makes a workable relationship between the cost of acquiring a customer (CAC) and that customer’s lifetime value (LTV). The most ideal ratio between the two is 1:5, but for startups to at least break even, they need to reach at least a 1:3 ratio. New businesses also need to keep in mind the rule of capital efficiency, which simply states that CAC should be recovered within 12 months of operation.
Unfortunately for Quirky, an invention platform meant for people to vote on product ideas, its entire business model turned out to be a flop. The products had almost no margins. For instance, the company spent over $400,000 developing a Bluetooth speaker but when the product was finally released, only 28 units were sold. Unsurprisingly, the company filed for bankruptcy in September 2015.
3. Product issues: Selling something that doesn’t work
To succeed in business, it’s not enough to have just one exceptional idea. You have to create a product or develop a service that actually improves people’s lives. Even if you have the capital to start your business and the employees to reinforce your vision, you will not become an overnight success if your product falls short of the market’s high expectations. It’s okay if the first product you offer isn’t perfect—no one expects you to get it right the first time. But when you don’t find a way to correct your errors and turn a fiasco into a learning experience, you’re bound to fail.
Your business is bound to collapse just like Grooveshark. A music-streaming service, Grooveshark was buried under a pile of legal issues because its product violated a number of copyright laws. For the succeeding years after its conception in 2006, the company tried to sign contracts with one of the biggest royalty companies. Misunderstandings, miscommunications, and just a completely flawed product caused this startup to incur many legal charges from music companies. The drama ended in 2015 when Grooveshark was forced to shut down.
4. Subpar employees: Assembling a team of half-hearted workers
In business, people are just as important as money or the product itself. If you have a weak management team, chances are your company won’t deliver. You have to make sure that you’re hiring the right people with the right skills and the right traits. These people need to be with you on every page. Otherwise, you may eventually find yourself falling flat on your face. Hire one wrong person, and you may put yourself at risk of losing your business.
KiOR, a renewable fuels company, closed in 2014 due to many reasons. One of the most striking problems that it had faced over the years was a poor hiring system that resulted to a surplus of lab researchers and a shortage of technical and operational employees. What the company needed was more people who had hands-on experience in running energy facilities. Unfortunately, it was already too late when the management realized that.
5. Bad competition: Ignoring what competitors do
It’s hard to come up with a unique business idea these days. Almost everything imaginable has already been attempted by bold entrepreneurs. If you’re starting a new business, there’s a huge possibility that somebody is already selling the product that you’re still trying to conceptualize. Even if you come up with something that has better features than an existing product, you still have to go a long way to overtake your competitor. How can you convince people that what you offer is fresh, new, and exciting? What differentiates you from the rest? Why should they switch to your product? Unless you can give effective answers to these tricky questions, you won’t be able to move forward in the business landscape. You should come up with a content marketing campaign that reaches and entices your audience. It’s the only way they can learn about your business.
Many startups learned the hard way that competition is an important consideration in business. One such company was Rdio, a music-streaming site founded by the same guys who brought Skype and Kazaa into the digital world. Rdio followed a subscription-streaming model, just like Spotify did. Because it was too much like its already-powerful competitor, Radio didn’t last that long in the startup scene.
6. Financing problems: Running out of cash and failing to make more
All too often, we hear stories of startups going bankrupt even after having raised millions of dollars in venture funding. Entrepreneurs sometimes become shortsighted after experiencing the initial wave of success. They take risk after risk without reaching any point of stabilization. As a result, they end up running out of cash. These aggressive companies fail to manage their cash flow and regulate their finances before reaching certain milestones. They fail to come up with long-term plans—they just go with whatever works for a specific moment.
One of the startups who were guilty of this was Homejoy, an on-demand home-cleaning services company that closed down in July 2015 after losing funds and failing to raise more. There were so many things about the company that didn’t go exactly as planned. Both customer and worker retentions were poor so the company basically had no foundation.
7. Wrong pricing: Failing to determine market profitability
For a startup to make money, it needs to set up the right prices. Entrepreneurs should be able to determine the perfect price points that can attract customers without hurting the business’ bottom line. To identify the perfect price points for the products or services that you offer, you need to determine your market profitability. Crunch the numbers and work out how much you should get to break even on time and scale up your business. Compare your prices with competitors and see what works. You may need the help of a numbers whiz on this.
For the company called Dash Navigation, pricing just didn’t work out. Dash Navigation was a startup that produced software and devices for in-car navigation systems. The company failed because of slow user adoption, which doesn’t come as a shock at all since their devices were sold for $600 apiece. Even though the product itself was marvelous, the sluggish sales forced the company to close down.
As the given examples demonstrate, startups can fail for many reasons. One fatal mistake can cause a business to unexpectedly shut down, regardless of its prospects or potentials. If you’re planning to kickstart your own business, you should try to avoid these mistakes and be a better and smarter entrepreneur. Be realistic in your ventures and plan 10 steps ahead if you can.
About the author
Anna Rodriguez is a manager and a passionate writer. She writes about investment, home improvement, green sustainability, business and tech innovations. She owns Homey Guide Blog. You can follow her at @annrodriguez021