Every year, more and more companies are being founded throughout the world. The variety of reasons for creating a startup is very wide. It may be a niche founded in the market, the eagerness to create something new, a great business model or simply the willingness to be their own boss. Startups are an important pillar in creating GDP of a country, yet somehow, many of them fail at the beginning of their performance.
Tough Odds For StartUps
According to the United States Bureau of Labor Statistics, only 56% of startups will make it to the fifth year. And this is only about surviving. When it comes to being successful, the stats are getting much rougher. For every funded startup, only 1 to 10.000 will become a unicorn (the expression for a startup worth at least $1 billion), while for non-funded startups, there is a 1:5 million chance for achieving this stage. Many startup founders fail because they make crucial mistakes on the way to build a company they wish to have. By examination of startups that went successfully and those that failed, we can distinguish a pattern of common mistakes, that if avoided, will increase your chances of success. So let’s focus on 10 reasons why startup founders fail and how to act properly.
1. Got The Idea, But Don’t Understand The Business
Imagine going to the equatorial zone in Africa without no gathering information which is crucial to go for such a trip, like proper vaccination, visa, clothing, social culture, contact to the embassy and so on. Sounds bizarre? Because the same thing goes with creating a business. You can’t really establish your own company when you don’t understand your business model and the environment. So if you really think that your idea is a true game-changer, knuckle down.
Do some study, define your user persona, understand your competition. And by the competition, I don’t mean only the companies delivering similar services or products to yours, but the entire competitive environment (for instance, the competitors of Uber are not only Lift or Bolt, but there’s also public transport, car-sharing, electric scooter sharing etc.) Last but not least, fill in a Business Model Canvas or a Context Map Canvas (pictured above), which is a simple exercise for 2-3 hours. You will be amazed with the power of this tool. Remember, your business model doesn’t need to be perfect from the very beginning. It will obviously evolve while you conduct your business. Just have something that looks reasonable where everything clicks into place.
2. The “Better Perfect Than Done”
Some founders tend to deeply focus on their product development before introducing it to the market. A sentence picturing this situation would be: “I need to have a full-blown product before deploying it.” And eventually, it’s a day late and a dollar short. This one may be caused by either misunderstanding of the product’s key value or perfectionism and overfocus on the details. But how can a startup be sure that it solves a real problem existing on the market if no end-user is entirely involved in the process? It causes a great danger of launching a shiny, fancy product of yours when there is no demand for it. So it’s best to stay agile, release an MVP, track your product users’ behaviour, search for opportunities, test and improve. Fail sometimes, so you can learn a lesson from it. Then you will be sure that you stay adjusted to your market’s needs. To recap, done is better than perfect.
3. Reluctance To Get Feedback And Criticism
This one relates to the reason number 2, but has a different origin, coming from the founder’s attitude. Some people believe in their idea so hard, that they even fall in love with it. Moreover, they think that they know everything about the market, have resources to build an app and have long-term plans. So, it seems like you have everything and you don’t need to consult with anyone, huh? Wrong. No man is an island and needs to refer to the others’ opinion. And by the others, I mean your associates, your friends and (moreover) your future clients. So don’t fall in love with your ideas, fall in love with people who will use your product. Talk to them. Understand them. Share with them your idea so you can get feedback. Don’t conceal your prototype, show it and take the criticism. Remember that learning is an ongoing process, so let it happen and get feedback with humility. Otherwise, you will end up with a beautiful app which no one wants to use.
4. The “I Won’t Sell Until I Have The Product Done”
There is a conviction that you can’t really sell without having your product done. While the right attitude would be: SELL FIRST, BUILD SECOND. This way you have the only chance to prove that your idea has real value for the market before taking some serious action. But how can you charge for a product that is not ready yet? The answer is simple: give incentives. You may go like this:
“OK Mr X, seems like if we launch our product, which will be delivered in 3 months, will be the perfect solution for you. The pricing will be around $$$, but if you make a partnership with us right now, I will put you on our exclusive client list with 50% of lifetime discount. Of course, be sure that the deposit is fully refundable if something unexpected happens, so you take no risk at all. What do you think?”
Having first clients on board will give you confidence that what you do really matters and has the potential. What is more, it has a huge impact on acquiring funding from investors, who are more favourable to those that have already proved the value of their concept. It will help you make a better deal!
5. Your Startup Is Burning Cash
The problem of keeping a healthy cash flow is one of the reasons why many startups fail. Imagine the situation when you endeavour to build a full-blown product of yours, hire an expensive specialist and even go extravagant with creating a convenient environment to conduct your business (i.e. nice office, expensive tech equipment etc.) while on the other hand, you don’t focus on attracting your future customers’ attention. This example might be exaggerated, but it’s a good picture of how creating a cashflow shouldn’t look like. When you spend too much money and you have a little source of income, you are burning cash.
The signals of stretching the distance between paying your suppliers and receiving payments? Low margin profit, high payroll costs, small recurrence purchases will do. However, the action is the most important thing. Firstly, you need to accept that at the beginning you need to cut your expenses that aren’t relevant to your business. Remember that many successful founders have started their adventure in a small garage, with little resources. So convenience isn’t the key. Secondly, don’t be afraid of selling your product in the development phase, because you need to acquire clients as quickly as possible. Moreover, feedback from them will help you improve your product and gain more customers quicker. Thirdly, keep your terms on a leash. Always negotiate terms with your suppliers that are longer than your clients’ payment terms. This will let you keep your cash conversion at a healthy level.
6. Micromanagement Tendencies
Great empires fall because of poor leadership. The same thing goes for prospective startups. Good idea and the conducive market won’t do, when the management fails. There are many shades of poor leadership, so let’s focus on one of the most common issues, which is micromanagement. Many entrepreneurs tend to micromanage. They like having everything under control, a perfectionist kind of a guy. So they put little trust in their employees’ work because they fear that team members will tarnish their hard-earned reputation. Another two reasons why leaders go micro managerial, according to the Harvard Business Review, are:
- they want to feel more connected with lower-workers job,
- they feel more comfortable doing their old job, rather than overseeing employees who now do that job.
Remember that this is not a good thing. And even though you feel good that you have everything under control, you might lose your time, which is scarce right now. But what is more important, you lose your teammates potential, since they might feel subservient rather than open-minded. So you need to remind yourself that your role is to be the team leader, the decision-maker, the visioner and the coach, not to oversee every step taken by an employee. So when you see in yourself the tendency to micromanage, write in some visible place George Patton’s words and make them your motto:
“Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.”
7. You Co-founded A Company With The Wrong Guy
When you partner up to start a company, a relationship with your co-founder will be like marriage – you are with them whether it is good or bad. So it’s arguably one of the most important factors that will impact your business in the future. Think of it when you decide to split shares with someone – is he or she the person that I trust and have fun to work with? If yes, it’s great! Otherwise, you split the company with the wrong person. So how to be sure that you make the right choice?
How To Choose The Right Co-founder?
First and foremost, ask yourself why do you need a partner? To increase equity? To have an expert in some field? Or maybe you just need a right-hand man who has been travelling with you during this business adventure before even a legal establishment of a company? What are their roles, contributions and responsibilities? Answering these questions will help you decide on how you’re going to divide shares. And remember, 50/50 is not a business decision. It’s a compromise. Imagine this: During your journey, you encounter a decision where your vision differs from your cofounder’s. That’s a stalemate which you can’t afford while conducting business. There must be decision making, always. So you must get through difficult conversations about responsibilities, contributions, roles, compensations. Eventually, you will be able to split a baby into two or more, unequal parts. Accept it and get used to hard decisions from the very beginning, they will accompany you always.
8. Inability To Raise Capital
There are a dime a dozen young entrepreneurs who become discouraged by the number of rejections received from potential investors. But little do they know that this is how it looks like. You will receive many nos before you find the proper funding. It takes at least 6 months and in many cases, at least one year of constant meetings, calls, visits and pitches. It’s the sale of your idea! Stay positive, but ask yourself how can you increase the odds? The answer revolves around these topics:
- Improve your pitch. Bad presentation ruins everything. Prepare yourself for explaining your idea as short and as simple as it’s possible. Do it within 60 seconds, using a problem-cause-solution frame. Be the cure for the market’s needs. Remember, like Einstein once said, if you can’t explain something to a six years old child, you probably don’t understand it at all. So keep it simple!
- Focus on people, not on an idea. The idea itself is not a moneymaker, it’s the people who stand behind it. So be confident and explain why your team is the right team to achieve success. Put some story in that will prove your expertise. Provide emotions to ignite hot cognition. People buy people, not a product.
- Proven track of your product. If you don’t do research in a market and don’t have ready-to-buy clients already, how can you be reliable from your future investor’s point of view? Do you remember the reason No. 4? Start acquiring your clients now, don’t make it dependent on future steps.
9. Poor Marketing
OK, so the product seems to be great and there is a place in the market for it. But how about marketing? Well, here is a devastating truth: if marketing activities are poor, it means in your prospective client’s eyes that you are weak. Seriously, good advertising is the key. In the times of full digitalisation, you have to show your company as an expert in your field. You can only accomplish it with marketing activities, building content in social media and creating appealing design and user experience because otherwise, it won’t sell. People love to buy beautiful things. So many entrepreneurs tend to focus on their product functionality so much, that they neglect marketing efforts. Really bad choice. So if you are not a kind of an esthetics-focused guy, you should have another guy who is. Knowing your target and knowing how to get their attention to convert them into real leads and ultimately customers are of real importance when it comes to being successful in business.
10. Failed To Pivot
This is pretty simple to understand but very difficult to do because it’s an emotionally related issue. Pivoting means changing direction to find a better way to achieve something. Staying attached to a bad idea which has no interest in the market or fails to be competitive may take your business down. Such a situation requires tough decisions to abandon some of your beliefs and to pivot your actions to another destination. I like to compare this situation to a ship encountering an iceberg. Iceberg symbolizes your doom and the distance between a ship and an obstacle symbolizes running out of cash, outburning in your team, etc. If you change the direction of your ship at the right time, you may still avoid the collision. But when it’s too close, the failure is inevitable. That’s why it’s tough because you need to anticipate the iceberg very early and give up your previous idea to focus on something more sufficient. Having a plan B prepared earlier can help in such a situation. So in general, be a visionary, but try to stay on the ground and consider other options.
The Bottom Line
To recap, when you start a business, it must be clear that there are many obstacles and hard decisions ahead. Anticipation and open-mindedness is the key. However, we understand that not everything goes according to plan and failures happen very often. It’s a good thing too! I always say: fail often so you can succeed earlier. It’s your attitude against failure that shapes you. You may either learn a lesson from your failures and try harder in the future or give up and let someone achieve your own dreams. Take Airbnb for instance. They had tried three times before became a successful, global company. Try as many times as it takes, nobody’s counting.
Our team brings technology to your business, however, we’re not here just to fulfil the contract. We’re eager to learn more about your business and become your trusted partner. So if you want a software company that understands your business objectives, contact us and let’s talk about your project!
