The Top 5 Reasons Startups Fail

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why do most startups fail

Some advice to make sure your startup doesn’t become a statistic.

Building a startup is hard, especially when the odds are stacked against you. I was reading a report by CBInsights on the weekend that listed the top 20 reasons startups fail and I couldn’t help but instantly switch to “mitigation mode” — which means as I read each reason I started to write down a few ways to stop them from happening.

And that’s what I want to share with you in this post.

Let’s start by listing the top 5 reasons startups fail. In order of most to least common, they are:

  1. No market need
  2. Ran out of cash
  3. Not the right team
  4. Get outcompeted
  5. Pricing/cost issues

Now let’s go over what I think is the most important consideration for each reason above.

#1 — No Market Need

To confirm there is in fact a market that needs and is willing to pay for your product, you should validate before launch. That means doing research before you create your product. It means deciding who your potential customers are, where they spend time and what problems they have now. It then means making sure you build a product that solves one of what I call their tier 1 problems.

I’ve written a complete step-by-step guide to validate your market before you invest anything in creating a product. You can read that guide here.

#2 — Ran Out Of Cash

Make sure you have 6 months of cash in the bank to protect against any downturn in sales. In some industries you’ll experience events which have nothing to do with your startup but that still impact your growth.

A good example that comes to mind is the infant milk powder market. Recently one of the major players had a contamination of their product and the sales of ALL companies in that market suffered for a period of a few months as parents let that one incident with one company blanket their view of the entire market.

I recommend having 12–18 months cash in the bank, but 6 months really is the minimum. If you’ve got less than 6 months of cash in the bank to fund operations, it’s time to start thinking about capital sources. Is it time to raise a round? If so, that takes 4–6 months.

#3 — Not The Right Team

Who are you micromanaging and spending a disproportionate amount of your time with? If you’ve just onboarded a new manager or leader, then you will of course spend more time with them as they ramp up and learn your business, but if they’ve been with you for 3+ months and you’re still spending too much time with them and providing too much direction, it’s time to decide whether to train them up or ship them out.

If you’ve got the right strategy, then of course you need the right team to help you execute. The saying “hire slow, fire fast” comes to mind here. Keeping any poor performers in your company not only impacts you and your progress, but will also frustrate their peers and undermine your ability as a leader.

#4 — Get Outcompeted

You need to understand your market as it is today, not as it was when you launched a few months or a few years ago. Just like technology changes rapidly, your market changes too.

Don’t build a product that solves a problem for a market as you identified it 1 or 2 years ago. Find a way to get continual, automated and unfiltered feedback from your customers and read it in detail. One of the first signs you’re getting outcompeted is when you start to lose customers to a competitor. Collect feedback from those customers, analyze it and look for trends. You can then make alterations to your strategy before it’s too late.

#5 — Pricing/Cost Issues

It goes without saying that if you can increase your prices while reducing costs, you’ll have more cash in the bank and therefore have a better chance of surviving as you figure out your market and how to scale.

If you’re in a market where price isn’t the number one buying decision, consider testing an increase in price. If you sell online, run a split test using Optimizely for 5–10% of your audience and test a price increase of 30–100%, depending on what you sell and what you’re comfortable with.

Most people equate price with quality, so testing a higher price may lead to a lower conversion rate but an overall positive impact on revenue, meaning you have a higher revenue with fewer new customers, reducing future costs to support and maintain that customer base.

OK so there you have it. The top 5 reasons startups fail and the one thing that I feel is worth considering for each of those reasons. If you’re struggling with any of the reasons above, I hope this post helps in some small way.

Get my PDF containing 21 additional ways you can mitigate the risk of startup failure. (Click here to download).

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