Why do 90 percent of startups fail?

26/10/2022 Filip M

The failure figures — avoid being part of the 90 percent.

According to Startup Genome and Embroker, surviving the first year as a startup is quite common, but only 10% of startups are able to establish themselves long term.

  • 90% startups fail long term (source: Startup Genome – the 2019 report).
  • 75% venture-backed startups fail (source: Shikhar Ghosh).
  • 10% new businesses fail in the first year of operations (source:Embroke ).

This article will label recurring issues that we have found from working with startups, and outline how those issues can be avoided.

Why do so many companies fail?

According to business owners, reasons for failure include lack of funds, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not lack of expertise. Let’s look at particular points in more detail.

 

Market fit

A lot of starting entrepreneurs start at the wrong end – the product end. This is usually a direct path to the graveyard of startups. It is easy to be drawn into the fallacy of perfect product — ending up with a solution to a problem that no one has. These startups believe that all the advanced features, micro-animations, and extra functionality on top of the solved problem will bring them more customers. Instead, they overbuild their MVP and prolong the time to failure. Here applies the phrase:

 

“Fail fast!”

 

Instead of the product end, you should start from the customer end. What problem are you solving? Are there enough potential customers willing to pay for your product? Are customers ready to use your product? Usually there is no simple answer to these questions, but with an MVP mindset, you can quickly test interest and see if your idea needs to pivot.

  • The product/service did not satisfy any need in the market — do the leg work
  • Fail fast — be open to changing plans

Marketing & Sales

This topic is tangled with market fit, but with mediocre a product and and excellent sales team, you may be able to succeed. In contrast, success rate with an excellent product and a mediocre sales team are low.

 

“What was first a concorde or a concord agreement?”

 

You guessed it right, the agreement was first signed (1962) and the first concorde flight took place seven years later (1969). What does it mean? That the very first day/month/year/decade of your startup venture, you should spend mailing and meeting with prospects, making deals, and filling the backlog. The earlier you have a traction, the earlier you have a better sleep.

 

Finances

This is the last problem you will have if your startup is failing. All the previous reasons will in the end be projected in the cash flow. As you already know:

 

“No money, no funny.”

 

Some stats (source: Exploding Topics)

  • Startups in online retail, accounting, landscaping, and construction typically have startup costs of up to $5,000.
  • Healthcare providers, restaurants, and manufacturing companies are among the most expensive startup companies and usually require more than $100,000 to launch.
  • A startup’s equipment costs can be as high as $125,000, depending on the industry and the startup’s product and service offers.
  • The lowest average equipment costs for startups are $10,000.
  • Payroll is among the most significant startup costs, with $300,500 being the average per five employees in the United States.
  • 58% of small businesses in the United States start with less than $25,000.
  • Startups in the venture capital industry, such as Uber and Airbnb, require debt of over $1 billion to be successful.
  • Healthcare costs are among the most significant challenges new businesses face.

Income

Money can be a good servant but a bad master. When dealing with money problems, you have to fix your market fit and your sales first. There are ways to supply your own cash flow, but outside money should only be used to accelerate your business, not as a substitution. Luckily investors and banks are good business-mirrors, and when you hear multiple no’s, you should get back to the base line and pivot your startup. Here you should try to maximize the utility of what you have already created and change business models, industries, or your target group.

Expenses

If your income side looks healthy but your margins are low or your cost of operation too high, you should try to tame your expenses. There is a big difference between investing and spending. If it is a temporary feature or person, it is an “expense”. If it is a strategic feature of person, it becomes an investment. As you cannot invest in everything, look only for sound investments and don’t invest in overpriced things.

Also if your costs hamper your growth, you can use financial instruments as in invoice factoring, operational leasing (cars, devices, …), loans or you can try to find an investor and sell part of your company.

Also, if you have a digital first product and team, you can leverage the ability to look for experts from other parts of the world, where you can save up to 50% on salaries.

 

Team

If you want to go fast, go alone. If you want to go far, go together. Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot.

 

“Teamwork makes the dream work”

 

Depending on stage of the startup, you may face different challenges. In the early stage of the startup, it can be overwhelming to be the developer, salesman, marketeer, sourcer, … in one person. Finding someone who can share the struggle with you can make a difference. Also, when it comes to sourcing your first employee, it is much easier and less “weird”, to do it in a two person team.

You may realize that your product or service has many more issues than you originally thought. Payroll is one of the highest costs that a business incurs, and having person for every competence just doesn’t make sense. Moreover, some of these issues are just temporary or just a spike in demand, and you will get by later with less people. A good way to go is outsourcing experts for particular skills that are not critical to your team. Outsourcing a CTO is not a good way to go, but outsourcing few developers when you are in a rush can save you some money and a lot of headaches.

You are trying to build strong core team – protect them from burning out and keep them focused. This takes a lot of time. It is always better to hire nobody, than hiring just anybody.

Tech

Tech problems are the best problems you can have. These kind of problems are usually solvable with either time or money. The biggest problem here is to admit you have tech issues. It is easy to be convinced by your developers that certain problems take long periods of time or are too difficult to solve. Or worse, that this easy business feature will take months to develop. These are all indicators that you may need to make improvements to your tech team.

 

“Give me a place to stand, and a lever long enough, and I will move the world.”

 

At the end of a day your tech is as strong as your team is. If you can’t rely on them, it can easily destroy your whole product/service. Moreover, startups in the technology industry have the highest failure rate in the United States – so choose your team wisely.

Final Words

Hard work pays off, but there are some shortcuts along the way, so don’t hesitate to take them. Just stick with your core values. Thank you for reading.

If you want to be the part of 10 % of a successful startups, you may use the help of KOALA42. We can help you to scale and elevate your software product with our team of enthusiastic developers, designers and doers. Book your meeting today (also possible to meet on the Web Summit in person).


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