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Why startups fail? Seven not-so-obvious reasons

  • January 18, 2023
  • 175 views
  • 6 minute read
  • Meg Rivera
startups
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Many successful companies were, in fact, born out of defeat: For example, Instagram pivoted out of being a copy of Foursquare, Burbn. Twitter rose from a failed podcast service Odeo. Finally, YouTube started as a video dating site. Some even say that failure is the default state of a startup.

The world is just too resistant to anything new, and where a successful venture flourishes, lies a pile of those that could not make it. However, those who do not risk cannot win. And those who take calculated risks and learn from the experience of others will increase their odds of taming the unpredictable and harsh sea of opportunities. As venture capitalist Lak Ananth suggested, we should not avoid failure but rather anticipate it.

Insufficient marketing research, cash problems, product problems, harsh competition, or plain bad timing have been vastly regarded as the most common pitfalls an aspiring new business should beware of. However, there are a number of other challenges that, though not cited as often, have nipped many endeavors right in the bud. Let’s look into them and see how we can avoid them.

Not pivoting on time

Pivoting in business is often compared with reviving a slightly worn-out romantic relationship. One should be able to catch the cues, understand what each party is seeking, and adapt the relationship accordingly before it goes south.

Similarly, one should know when to pivot from a bad product or a dysfunctional business strategy before it saps too many resources, gets your employees frustrated by the lack of progress, and eventually ruins your business.

For example, Berg’s Little Printer, an IoT device that was supposed to print out interesting pieces of news found on the web, had a bunch of loyal followers but failed to make it because the team failed to adapt its rather environmentally unfriendly product to the sustainable business trends.  

Pivot going bad

Leaving the party before it is over is a useful life skill. You should be in tune with your intuition to decode the signs of an imminent shut-down, grab your jacket and go home (or elsewhere) before all the fun dies out.

Otherwise, you risk overspending yourself and end up in the awkwardness of a half-empty dance floor and stale atmosphere rather than a vibrant afterparty. The same applies to pivots: while some decisions can be extremely successful, others may fail due to a number of reasons within or out of your control.

Pivoting for the sake of a pivot won’t lead you anywhere, you need a blueprint of what and exactly you want to achieve and how the success will be measured. It is essential to remain flexible enough to admit mistakes and move on either to a new pivot (if that is still feasible) or to a new business idea.

There is nothing worse than becoming one of those zombie startups that fail to acknowledge that they are dead and keep wasting their investors’ money to keep the illusion that the business is still alive and kicking.

A disconcerted team

Disharmony in the team can bury even the brightest business idea. In fact, almost a quarter of startups shut down because of staffing problems of various sorts. People are the main asset of a successful startup, and it’s sometimes worth going the extra mile to find the perfect hire who would fit your star squad both in terms of competence and values. In addition to hiring the right staff, it is important to build a team with a shared vision and commitment and manage it properly.

While most startups are rather tight on the recruitment budget at their onset, building a hybrid or even a fully remote team may be the cost-effective solution that will let your startup thrive. Companies like StartupSoft, for example, can help you gather a highly professional remote team that will be as consolidated as the one working from the ‘normal’ office base.

Gaps in the customer research

Being inflexible and blind to the needs and wants of the customers is the quickest way to drown a startup. Being married to an idea, however brilliant it may be, and not gathering user feedback is a fatal flaw of many entrepreneurs who claim to embrace the lean start-up approach, but actually adopt only part of it. You cannot make other people grow to love something, and if you still insist on doing that, you may end up using your product all by yourself.

Along with producing MVPs and holding custdev sessions, make sure you do enough customer research before you even begin working on your product to avoid a false start. For example, the co-founder of a shoe customization startup Shoes of Prey, Michael Fox, had to admit their startup journey was merely a hard way to learn that “mass market customers don’t want to create, they want to be inspired and shown what to wear.

They want to see the latest trends, what celebrities and Instagram influencers are wearing and they want to wear exactly that  —  both the style and the brand.” Couldn’t this outcome have been avoided if the company had researched its target audience better? In this particular case, there was a huge gap between what the customers said they wanted to do and what they actually chose to do, so the research should have assessed not only the conscious responses of the users but also their behavior. Ironically, listening to the customers alone does not always do the trick.

Legal challenges

Some business ideas look great on paper but can hardly survive the real world and all of its legal complexities. Many of us remember Formspring, the anonymous Q&A forum, where one could anonymously ask questions or send messages to other users. It skyrocketed, accumulating 1m users in just a couple of months, but as its user database grew, the company encountered numerous issues associated with user anonymity and lack of accountability. Cyberbullying grew rampant and even resulted in several cases of teen suicide associated with the victims’ use of Formspring.

The company tried to address the issue of cyberbullying by limiting the anonymity of the users, but the service lost its public appeal as a result of the policy changes. As a takeaway from this story, one should be aware of the potential consequences of one’s endeavors and think ten steps ahead to prevent any legal issues before they harm the business beyond repair.

Premature scaling

Some startups were doing great until they tried to scale up. For instance, Groupon, a service that allowed its customers to buy discounted coupons, was deemed a huge success and ‘the fastest-growing company ever’.

After filing a very successful IPO, the company started incurring huge losses and its share price dropped by half in just a few months. Essentially, it was the company’s unsustainable business model that drove it down to the ground. Groupon did not innovate or address its preexisting issues by prioritizing new customer acquisition over client retention.

Although the hasty attempts at scaling up did not kill the company, it has never grown to the giant it promised to become. So, it might be too early to scale your business up if you are still struggling to identify your business model or do not know who your customer is. ‘Just do it’ is not the most universal motto when it comes to building a startup.

Burnout

Finally, many startups fail because of plain burnout. Entrepreneurs face a lot of pressure trying to live up to their image of success. As such, nearly half of all business owners are suffering from some sort of mental health condition, such as anxiety or depression.

Since the road to creating a thriving business is nothing but bumpy, oftentimes, the pressure build-up is just too high for the entrepreneurs to see their ventures through. Here, one should remember that it is essential to stick to a reasonable working schedule and not to be afraid to delegate responsibilities.

The ability to delegate, outsource, and automate mundane tasks is by no means a symptom of weakness or loss of control, but rather a sign of maturity and rationality, which translates to overall business efficiency and higher odds of keeping your startup afloat.

All in all, though reading through all the startup post-mortems may be overwhelming at times, let this not discourage you from venturing for something great. By carefully analyzing the failures of others, you get a chance to pave a path to your own success.

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