Updated: Nov 5, 2021
From running out of cash to not having the right expertise in place, we take a look at the top 5 reasons start-ups fail #startups.
In August this year, CB Insights conducted an audit of 111 post mortems for failed start-ups. We sifted through the data and compiled our top 5 reasons. CB Insights found that while there is rarely a single reason, a pattern of commonalities emerges.
“while there is rarely a single reason, there is a pattern of commonalities that emerges”
Let’s take a look at our top 5 list from the study:
reason number 5:
A previous colleague once said, ‘the art of pricing is to capture price of a product in the mind of a consumer’. So how do we get into the mind of a consumer?
In the Hotel pricing world on a normal day, we set a price and monitor how quickly it is selling. If the day is selling too quickly, we increase the price. If the day is not selling, we test price drops to find and improve the booking pace. Understanding the demand drivers, where your customers are comfortable to buy and the value of your product is essential to a successful start-up.
Capturing the price, however, is only part of the equation. The revenue a start-up collects has to be higher than the costs it accumulates. That is the simple, fundamental principle of any profitable business. For example, take Arivale, a genetic testing and scientific wellness start-up forced to shut down in 2019. The shutdown was a surprise to many partners and customers, but the reason behind the company’s failure was as simple: the price of running the company was too high compared to the revenues it brought in.
reason number 4:
competition crushed them
Focusing too much on your competitors is a recipe for an identity crisis; however, ignoring them is a recipe for failure.
Often when a product comes to market, there is a race to be the first established brand in that space. As a result, many start-ups emerge with new products, but few survive. Having one eye on what your competition is doing and ensuring you perform better is a key to start-up success.
Take Uber, for example. When the sharing economy was in its infancy, and many new players were entering the market, better products were around than Uber. Sidecar cited in their post-mortem:
“In short, we were forced to shut down operations and sell. We were unable to compete; as a result, we were against Uber, a company that raised more capital than any other in history and is infamous for its anti-competitive behaviour. The legacy of Sidecar is that we out-innovated Uber but still failed to win the market. We failed – for the most part – because Uber is willing to win at any cost and they have practically limitless capital to do it.”
Uber was just more aggressive than the rest and became the dominant brand. While some smaller brands have managed to survive in pockets, Sidecar didn’t, and Uber scaled at frightening speed globally.
reason number 3:
the wrong team
Having the right expertise is at the heart of what we do at Grind Equity. But, unfortunately, it was also at the heart of why 23% of start-ups failed, as cited in their post-mortems.
From trying to do everything yourself creating a lack of time to conflicting views internally; having the right team around you as an entrepreneur is a top priority for success. Having the right professional support around you so you’re not using QuickBooks until midnight or updating a WIX website at 1 am allows an entrepreneur to focus on delivering the bigger picture. And most of all, a professional team will constructively challenge your ideas to ensure the best decisions are made for the business.
Our top tip here is to engage professionals as soon as you can afford to. Or perhaps consider a service like Grind Equity to swap services for equity. However you do it, seek out a team that will challenge you but not conflict with you and embrace others opinions to reach the best outcome.
reason number 2:
ran out of cash/lack of funding
Finding funding is challenging. But finding more and more funding is hopeless when cash flow is not prepared correctly. Many businesses simply run out of cash in the bank, and their investors become unwilling to tip more in without a steady flow of income. It leaves businesses wondering if they’ll be able to afford the rent on their coworking space next month or pay the electricity bills to keep the lights on at home.
Businesses can generate income but still find themselves in cash traps. We have even seen businesses generating millions in topline revenue, but they have priced their product with a very low-profit margin and carry high payroll costs. The more they sell, the higher their variable costs, which creates a vortex of cash flow.
Along with a lag between sales and cash in the bank, these are classic symptoms of a company with poor cash flow. The saying is that “Cash is King’,’ but in our view, the expression should be “Cash Flow is King’.’ At Grind Equity we seek to spot these symptoms early and ensure your start-up is primed for success.
reason number 1:
no market need for the product
So many entrepreneurs fall in love with their idea and forget the primary purpose of a business: to solve a problem people are willing to pay for.
I have personally invested money in solving a problem I had, but nobody else had. Experience is a funny word. I think what people are really saying when using the term “experienced” is they’ve made the mistakes already, so won’t make them again. That’s unfortunately true for me. In 2016 I invested money to develop automated signage for meeting rooms in hotels. The problem was, nobody wanted to buy it. Most Hotels were happy to print an A4 piece of paper and post it outside the room.
There are only so many Steve Jobs in this world who can invent a product we didn’t even know we needed or wanted (tablets). For the rest of us, there are ways to test the market; speak to people who would buy your product. Try to avoid asking friends or family who tend to have a bias. Instead, use market researchers before significant investment, or even better, get in touch with Grind Equity, and we’ll partner you with a mentor experienced in that field to provide honest and professional feedback about your idea. However you do your market research, just do it (as Nike would say).
There we have it. Our top 5 reasons for start-ups failing. At Grind Equity, we work to ensure your idea has the best chance of success. So get in touch for a no-obligation discussion and find out if we can help your business succeed.