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Why Startups Fail, and Strategies to Avoid It

Building a startup is no mean task. And in this age of unicorns and startup success stories, it is easy to get swayed by the glamor and jump into the deep end of the entrepreneurship pool. The reality, however, is quite sobering – more than 50 percent of small businesses fail in the first four years. While a few make a fortune, majority of the startups die within a short period of their launch.

Here, I’ll try to shed light on the common challenges that startups face, and strategies on how to overcome them. Let’s go through them one at a time.

Challenge 1. Absence of a Market

You have a great idea that you think has the potential to become the next big thing and shake up the market. But does it actually have a market? Did you conduct a proper and scientific market study to prove the validity of your product and services? A major reason why startups fail is due to the lack or absolute absence of a market for your products.


Just believing in the brilliance of your product is not enough; you have to be sure that there’s a market for it too. You need to get the timing right, so that your product or solution is not too early for the market nor too late to get lost among the crowd. If you end up making a product that has no need for your targeted consumers or is insignificant in their daily scheme of lives, your effort is bound to go to waste and your company loses all its resources.

Solution:

Research your market thoroughly before you invest in your product. Try to gather as much information as possible, preferably from people you’re targeting. Remember that an idea is successful only when people like it. Don’t center your business model based only on the idea itself; because if this idea doesn’t resonate with the people, your startup won’t flourish as you want it too. If you’re too focused on the brilliance of your idea it might distract you from what your consumer actually needs.


Challenge 2. Lack of Funds

You cannot run out of cash if you want your startup to succeed. It is the fuel to your business, the lifeline to your ideas, and the necessary currency through which you pay your dues to your employees, vendors, and clear your bills. Most often, the founders of a budding company fail to define the monetary strategies and do not have a distinct business model that dictates the commercial and economic viability of the business.


It is important for the CEO of a startup to set down key milestones, to understand how much cash is required for the company to achieve the first/next milestone and whether achieving that milestone would lead to a positive cash flow or not. Most frequently though, the company runs out of cash way before reaching its milestones, and the management fails to keep a track of accounts with indiscriminate thoughtless expenditures pushing the business down the drain.

Solution:

Keep a track of your cash, of your expenditures and whether each expense is adding anything to the overall development of the company. Working on a break-even helps the management understand if there’s a requirement for generating funds immediately; and explore available funding options to secure the capital before it’s too late. It’s also important to work on a business model that focuses on an achievable customer acquisition strategy, estimates your sales cycle and return on investment.


Challenge 3. Ineffective Management

You’d imagine that when an entrepreneur had decided to venture into the startup world, they’d know what it takes to run the business. But most often than not, startups fail because of weak and poor management teams. Ineffective management leads to weak strategy, poor execution and bad hires.


A weak management team is responsible for ideating and building a product that nobody needs, along with a poorly developed and executed strategy that does nothing for the product and the business. Ineffective management is also the result of a lack of vision and clarity that prohibits the leaders to identify the actual needs of the company. However, a company is doomed if the management doesn’t hire the right kind of people. Hiring weak people or building weak teams leads a company to self-destruct mode; and an entrepreneur needs to be aware of the same.

Solution:

Identify your strengths and weaknesses. For your business to work, you need to be objective about yourself, avoid ego tussles with your partner/s and hire at least one person from a different discipline to join you. Spend time on deciding the type of people you’d like to join your company, because once you’re with good people, trudging through the tough times become much smoother and making something your customers want become much simpler. Ask questions but be ready to own your decisions too. And most importantly, COMMUNICATE.


Challenge 4. Lack of Focus

As the founder of your company, you might have several ideas in that brilliant mind of yours. Ideas that you’d like to work on immediately and let the world know of their potential. However, if you’re finding yourself getting distracted by these ideas too often without having enough proof of them being substantial for your company, STOP.


There are myriad distractions that have the potential to take your focus away from things that matter most – users and product. Pretentious coffee meetings with prospective clients, partners or investors; networking summits and events; conferences; social media management and PR just because everyone’s doing it; and many more. Sometimes, entrepreneurs, in a bid to be over-zealous, start micro-managing that eventually takes their focus away from the primary job at hand, stressing them out and probably sleep-deprived on most days.

Solution:

There’s a reason leaders delegate tasks to certain people in their team. So that they can focus on the main task at hand – that of leading their company and its products to more and more users in the market. You cannot get yourself involved in issues that do not serve your main purpose. Avoid meetings that can be done without you, don’t meet people you don’t like, stop micro-managing. Understand that the only way to stay on track for building your startup is to constantly develop your product and talk to your target audience. In fact, maintain a daily schedule that not only includes your list of ‘to-do’ but also ‘not-to-do’.


Challenge 5. Poor Marketing

You have a great product but you don’t have an effective marketing strategy to support it; you cannot expect your product to succeed. In this age, where marketing is not just limited to traditional marketing, and word-of-mouth has found a new voice in social media; it is an entrepreneur’s inadequacy if he/she is unable to market their products suitably.


An important thing to remember, however, is that poor marketing doesn’t only refer to ‘less marketing’. It can also mean ‘over-the-top’ or ‘exorbitant marketing’ where the company spends a whopping amount of money on marketing before actually understanding the psyche of the target user. That’s why companies like Bodega shut down even after being covered by The Washington Post, CNN, and the like. Nowadays, marketing is not just about the product; it’s about connecting the elements of your product to your core audience and building a loyal fan base who can take your brand forward.

Solution:

Understand the kind of marketing your product needs. Don’t spread yourself too thin, don’t constrict yourself to one platform only. Do a thorough research to locate where your target audience is, and tailor your marketing strategies and content to suit that audience type. For example, if your core audience is teenagers invest in Snapchat and TikTok. If your audience is middle-aged stay-at-home moms invest in traditional marketing. Focus on reaching your small group of followers first, build strong organic relationships with your users and invest time and effort in marketing channels that generate results.


Challenge 6. Premature Scaling

The problem of premature scaling is tricky. Apparently, you’re doing everything right and your company is growing at more than a satisfactory phase. However, pause the celebratory button and think for a while. Is your business expanding faster than you or your product? Are you looking at over-hiring within the company, unmanageable customer acquisitions and rapid market expansions? These are definite symptoms of premature scaling.


Premature scaling is the concept of ‘too much, too soon’. It can be too much of funding, too much of hiring, too much of spending on acquiring customers, too much of product investment before the market is actually ready to accept it. The more an entrepreneur gets lost in the fast-track growth of the company, the more are their chances of turning a blind eye to the problems of premature scaling. With time, the problems become costlier and can result in technical debt – a critical issue that every startup owner/founder needs to be aware of.

Solution:

Sustainable growth is the key to any business’ success. Maintain a healthy pace by focusing on elements crucial to your business – focus on understanding and retaining your current consumers before targeting new audiences, improve your product quality and usability, hire quality staff only and as needed, don’t chase profits before realizing your target market, and be thrifty and wise while raising and spending funds. Though the main aim of a startup is not to remain a startup anymore, growing ahead of time without understanding the consequences can often lead to an untenable pace and ultimately, failure.