Startup Failures: Top 5 Reasons Startups Fail

Startup Failures: Top 5 Reasons Startups Fail

Starting a business is an exciting prospect, and for many, it's their chance to glory, financial freedom, and fame.

However, the startup failure rate is 90%, with over 20% closing down the business in their first year and 50% in their first 5 years. If you look closely at the current startup ecosystem, you can find a pattern similar to this huge failure rate.

If you are someone who is planning to start a business, it is essential to understand the dots that are often linked to business failure.

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1. Wrong Intentions

The business plan of any founder is to build a product that creates a smooth and satisfying customer experience and a platform that adds tangible value. This builds customer loyalty, which forms the foundation for attracting investors to grow and scale the business.

However, many startup founders do the opposite. At the onset, there primary aim is to raise funds from potential investors through new businesses, often by sugarcoating generic products or services. This business model is a dead-end.

Look at the below proposal. A tech startup that has been hardly active for a few years and has less than half a dozen clients expects 3.3 Crore for a 5% stake, all in the name of being technologically advanced.

Every second Tech startup, including Fintech startups, talks about owning an AI or IoT-powered platform that is smarter, robust, etc., and often projected only for investors for funding.

A company is formed based on customer needs and how efficiently they are met. If these requirements are met, funding becomes optional because businesses can be expanded on profits and other banking options, not necessarily from venture capitalist funding.

The onus is on the aspiring entrepreneurs to develop a product that resolves the pain points of the customers.

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2. Starting a Company VS Building a Brand

Both look the same but have distinctive working styles. For instance, a regular start-up will operate in a "Start to Finish" fashion, whereas a Brand (in-making) will work in a "Finish to Start" style.

Example:

• Traditional Firms: Product/Service-Marketing- Sales- Customer Service- Client Retention
• Brand: Product/Service- Client Retention- Exeception Customer Service- Sales- Marketing or Branding

Startups that want to build their name prioritise client retention or returning customers at the very onset. They build the entire framework of their operation based on the end goal of their offering, which is creating a large returning customer base.

They are concerned about users' feedback and constantly improve. A good part of their revenue is generated through referrals, whereas regular startups burn cash to get new customers.

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3. Lack of a Future-Proof Product or Service

Many startup founders launch products or services that are well-suited to the present times and market conditions but fail to anticipate future demands to ensure startup success.

The rapid evolution of technology and consumer needs makes it essential to think beyond the immediate timeline.

Take the example of CDMA SIM cards. Anil Ambani inherited a mistake rooted in Mukesh Ambani's initial miscalculation. While GSM technology was designed to transition seamlessly from 2G to 3G and beyond, CDMA lacked the flexibility to adapt to changing technological landscapes.

By the 2010s, it had become obsolete and unable to meet evolving consumer demands. There are plenty of such examples.

As a businessperson, it's critical to focus on developing products or services that are future-ready and designed with the adaptability to evolve alongside technological advancements and market needs.

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4. People Over System

At the heart of any company's operation relies on a proven system in the form of software, SOPs, performance management, etc. However, many solo entrepreneurs or business partners make the common mistake of becoming overly reliant on certain employees for core functions. This is a common mistake made in small business administration setup.

This dependency can be a significant vulnerability.

For example:

• An engineer responsible for designing a critical product or service leaves, creating a gap that the organization struggles to fill.

Relying too heavily on individuals for essential operations not only risks disruptions but also limits scalability.

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5. Lack of Empathy

Empathy is often viewed as a personal trait, but in today's world, where everything revolves around user experience, it is a critical component of business success.

Understanding the perspectives of potential customers, employees, and even partners allows a businessperson to stay in tune with the critical aspects of their operations.

Empathy enables founders and new business owners to identify pain points, anticipate needs, and create solutions that truly resonate with their audience.

This human-centred approach enhances customer satisfaction, fosters loyalty, and builds a positive organizational culture—both essential for sustainable growth and success. Empathy, in essence, is not just a virtue; it's a strategic advantage.

There are many other reasons for startup failures, including cash flow management, impulsive decision-making, lack of business forecast, etc.

Business today is challenging, especially if you lack the head-start that is often needed for a successful startup.

Yet, the risk-to-reward ratio with business is proportionate, and the current startup failure rate should not stop you from achieving your long-term goals, especially if you have something new to offer in the market.

Write down what you think or share your experience or opinion.