Why Do Startups Fail?

Startups are daunting and arduous for every entrepreneur, and they demand a considerable amount of resources. But sometimes, even after coming up with a product that will turn people's heads and after putting incredible amounts of effort into it, startups more often than not fail.

Reasons Why Startups Fail

Here is a list of reasons why startups end up failing; they are listed in no particular order.

Not enough Cash

Running out of available funds or not raising enough funds to cover expenses is one reason that causes startups to struggle and fail. But what makes them run out of money in the first place?

Simply put, startups are businesses that are in their infancy stage. Their objective is to earn a profit, but it takes time to become established, and it is during this waiting period, businesses incur excessive debt. That, along with making no revenue, startups more often than not fall into money pitfalls. Two pitfalls startups fall into are: underestimating expenses and reckless spending.

• Underestimating Expenses: The first pitfall on why startups run out of money is that they don't have a cohesive budget to follow. A budget is a guide for the business to allocate funds where necessary. A survey conducted by specialist insurer Hiscox in 2011 on the mistakes small businesses make while setting up revealed that 32% of startups underestimate their monthly expenses. Startups are founded by people who specialize in their field, which often doesn't include financial literacy, leading to limited funds' mismanagement. Hiring a competent accountant and financial planner will help to navigate the ambiguity of how to handle finances.
• Reckless Spending of Available Funds: Another pitfall of why startups run out of money is that even if a startup successfully raises funds, they quickly become misguided on how and where to spend the money. Instead of using the money to grow the business, some entrepreneurs pay themselves high salaries and splurge on unnecessary amenities.

New Product Not Accepted into Market

A new product may not be right for the current market or right in its current form. As a startup, a product may be too innovative, or all the kinks are still not worked out, so it is understandable when a product does not successfully break into the market. Timing is critical when introducing a new product to the market.

No Market

Another reason that leads to a startup's demise is when there is virtually no market for the product. The creator conceived an idea of a product that, to them, may be revolutionary, but if there is no one to buy it, it's not going to sell. Research conducted by CBInsights on 101 different startups said the main reason 42% failed was that there was no need for their product.

For example, a company is trying to sell toilet paper to a market that exclusively uses bidets. Is it possible for the company to sell the product successfully? Apart from a handful of individuals, there is little to no chance that this company will succeed in the market. Market research is paramount when trying to identify if a product has a market to begin with.

Poor Management Team

For a startup to successfully achieve its goals, it needs people to co-ordinate and work together. A well-balanced management team helps the company achieve synchronization and motivate its employees. A management team that doesn't embody the values of the company is another reason why startups fail. Bad management teams are incompetent, and they often think about themselves rather than the company.

They are damaging for the following reasons:

• Lacking Communication: Communicating is not a top priority for a bad management team. Employees need to know what to do and need someone to answer to. Bad communication will lead to mismanagement of resources, people not performing to their potential, or doing things they're not supposed to do, leading to various problems.
• No Vision or Strategy for the Company: A strategy and vision are crucial as it gives a company a blueprint on operating. Creating a good strategy is the hallmark of a good management team. A bad management team doesn't make to effort to envision what's right for the company, which leads to bad decision making and poor performance in the company.
• Poor Rapport with Employees: Poor management teams are bad at building rapport with people in the company. Having good rapport makes people more receptive and motivated to perform well, which is vital for a startup to survive. Bad management uses their superiority to get the employees to do what they want, often at the company's expense.

Competitors with More Resources

The final reason why startups fail is that there are better-funded competitors. Unless the product is unique, a competitor is often better at producing and selling it. Even if the company has a unique product, the competitor most likely is not above getting their hands dirty to acquire the startup or even develop a competing product. These competitors are better funded to take the loss while the new startup struggles to survive. Doing market research and developing a product no one can replicate is one of the few ways of staying in the game.