Non-starter: 3 common reasons a startup fails

Public perception of the modern startup is one of admiration: men and women putting in 100-hour weeks to build their dream and being rewarded with success. However, the truth is far less glamorous, with a study by Startup Genome finding that more than 90% of startups fail. Why is the likelihood of success so low? Unlike a typical new small business, startups are often founded on the principle that they are something new and unique, and that their ideas will help them be successful. Yet there is far more to success than that. CBInsights reports that the top three reasons for a startup's failure are poorly assembled teams, a lack of funds with which to continue, and the market having no need for what a startup is offering.

The wrong team

Anyone who has ever dreamed about starting their own business has given a lot of thought to who would make up their team. Should you recruit friends that you can already trust? Or diversify with relative strangers who have expertise in critical areas that you don't? Should you forgo all of this and run a solo operation? According to the experiences of entrepreneurs surveyed by CBInsight, a diverse team that covers the necessary bases is always preferable, and this need scales nonlinearly as a company grows. A company composed of trustworthy friends certainly brings peace of mind, but in terms of finding success, it doesn't usually do the trick. A company's focus should be executing on their ideas well, and that requires a team skilled in many different areas, from branding to management to product development.

This need becomes more prevalent as a company expands. Managing the transition from a startup culture to that of an established company comes with a lot of growing pains. Running, say, a compliance or human resources team with the accountability appropriate for a successful business is a major paradigm shift that many startups struggle with. The need for oversight or logistical roles is frequently ignored by entrepreneurs experiencing their first true taste of success, and this will all too often result in a startup failing tantalizingly close to the finish line.

90% of startups fail, leaving workers jobless and frustrated

Ran out of money

Another common reason for a startup's failure is perhaps the most obvious one. Once the cash stops flowing, so too do a startup's operations. Spurred by the funds of an "angel investor," startup owners will frequently shift their efforts into building the company and the product at the expense of procuring more funding. For many entrepreneurs, obtaining a large investment causes them to quickly forget just how quickly that money can disappear when they funnel it into their startup's growth.

According to VentureBeat, startups with conceivable ways to increase their Monthly Recurring Revenue (MRR) should do so with haste. The appeal of respectable MRR metrics to possible clients and investors cannot be overstated; a lack of a respectable stream of revenue will make creating one even more difficult as investors balk at a startup that cannot keep itself afloat. Getting a startup to a sustainable financial situation removes a large amount of risk from the equation and allows owners to focus on other pressing issues.

No market need

The modern startup culture is plagued with an over-appreciation for cleverness; startups are often inspired by coming up with a solution to a compelling or difficult problem, instead of a problem that the market needs to have solved. A lack of a space for a startup's products or services is the number one reason these ventures fail.

A startup might solve a decades-long annoyance in a particular field that would make customers and professionals happy everywhere. Or it might solve a problem few people found issue with, or even invent a problem altogether. Whatever the case, a startup can and will fail no matter the quality of an idea if it can't be monetized adequately and appeal to a certain audience. A notable example is the now-defunct Washboard. A rundown by The Washington Post details this infamous startup that would ship quarters to customers, intended to be a solution to the issue of gathering change for use in laundromats. The laughable business model, coupled with the inherent lack of logic that comes with selling the idea of paying a 50% markup on quarters to laundromat-using (and therefore lower-income) consumers, resulted in the company folding. Washboard is a perfect example of a startup that was completely unneeded and had nowhere to go in an economy overfilled with "unique" ideas.

Startups cannot succeed thanks to a trustworthy team or a smart idea. There needs to be a need for what the startup is offering, and a team that covers all the bases for building the product and company is an absolute necessity. Without either, owners will find themselves looking at an empty bank account before long.

Categorised in: Business Law

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