What are the main causes of startup business failures? Learn more about the biggest tech startup risks, get familiar with some tips to prevent your project from stumbling and make it succeed.
Main reasons startup businesses ask themselves when the game is over
It’s probably no longer news to anyone that more than 90 percent of startups fail. This is a well-known fact, as starfish shaped like stars, and the fact that Elon Musk is not a person. Moreover, Small Business Trends reports, that every second small business fails within four years of startup. According to BDS (Business Dynamics Statistics of US Census Bureau), annually about 400,000 new business projects are getting closed. This is as much as the population of New Orleans, Louisiana.
These horror stories are not to intimidate you and discourage any desire to start a business or make you lose faith in the project. This is for you to learn from the mistakes of others. After all, often they cost a lot, so let's look at the main areas where a new business project may face risks and immediately learn valuable lessons from what has been said.
Analyzing the collapse history of 101 startups, CB Insights identified 20 main causes of startup failures, the first ten of which are shown in the illustration below. Based on this data, let's focus on the six main causes of startup failures, and of course, let's draw some conclusions.
Reason for Startup Failures No. 1 - No Market Need
One of the reasons for the failure of 42% business startups surveyed was the lack of market demand. It’s not enough just to come up with a cool idea for tech startup. Gathering a team and finances is not enough as well. Your tech startup should solve some kind of market problem. At the very early stages of creating your business project first of all your idea needs to be tested, and determine whether it is advisable to continue development, or to cancel its creating and save the time and energy. You probably don’t want to create a product that is not needed by the consumers? It may also happen that your product is needed, but the size of the market is too small. That means, not many consumers need this startup product.
Conclusion / tip: Explore the market and the needs of your target audience.
To do this, use an effective tool - The Value Proposition Canvas by Peter Thomson. This tool will help you thoroughly research the clients' needs, as well as understand what they are currently using on the market instead of the software product that your startup team plans to launch.
Reason for Startup Failure No. 2 - Financial Issues
From the list of twenty main reasons of startup breakdowns, as many as three address the topic of finance: ran out of cash, pricing/cost issues, and also no financing/investor interest. According to Fundera, 82% of businesses fail because of cash flow problems. Some tech startup teams face financial difficulties as they can't convince investors of the viability their idea. So many startup teams don’t have enough funds to develop a business project. Often, business founders are faced with the fact that the tech startup development in the end required more finance than expected. Sometimes the opposite happens when a tech startup, having a large budget, misallocates it or spends money too quickly.
Conclusion / tip # 1: Plan your budget carefully.
This can be effectively done with the help of IT consulting, during which, among other things, an estimate of the tasks is carried out and financial costs and the total costs of the project are determined. That is, you will know the amount of work for startup development and will be able to allocate the money.
In order to save money and properly allocate funds, use financial consultations, during which you will plan expenses and analyze their reduction. It would be also advisable to place a financial director on your startup team.
Conclusion / tip # 2: Choose the right pricing model.
Among the existing pricing models, choose the one that is most relevant to the circumstances and capabilities of your startup team. For example, if your startup has a limited budget, it’s better to choose a Fixed Price model or FFF pricing model. And in case you prefer to pay gradually for the stages of the work done, pay attention to the Milestone based and the Time and Materials pricing model.
Conclusion / tip # 3: Use the services of an outsourcing IT company.
This will help to significantly reduce the cost of your startup development, and the quality will not be affected.
Reason for Startup Failure No. 3 - The Wrong Team
You will probably agree that the team is perhaps the most important engine of technological startup progress. This applies to both business founders and performers. Of course, it is very important to unite around a common vision and consistently achieve the long-term startup goals. At the same time, the decisive factor leading to a successful startup is the presence of a technical director or an experienced technical team.
Conclusion / tip # 1: Choose a reliable software company for your startup.
To ensure that your technology startup is not defeated, it is critical to choose a good software provider who has significant experience in software development, positive customer reviews, completes projects according to deadlines, provides “bulletproof” data protection and development confidentiality. A reliable development company within the custom software solution will provide a high-quality IT-consulting that will help prevent many risks and avoid a startup's failure. In this case, the guarantees that it gives your startup team will be a strong argument in favor of the company. For example, a software provider signs a contract with a customer, ensures transparency of the development price, and provides a lifetime code warranty.
Conclusion / tip # 2: Choose the best engagement model.
To develop a technological startup, select the appropriate engagement model with the supplier company. Do this based on the goals, timing, scope and financial capabilities of your business project.
The engagement model will help you draw up a clear plan of action and will form a mechanism of cooperation between you and the development company. The timeline of creating a startup, the amount of costs, the quality of software product development, risks, and also how predictable the result will depend on the choice of model.
Conclusion / tip # 3: Have key people on your startup team.
Make sure that your startup team has key people: CEO, CTO, CFO, Product Manager, marketer and, of course, a trustworthy and experienced development team. Read more about the irreplaceable team members of your startup in this article.
Reason for Startup Failure No. 4 - Great Competition
Fierce competition is among the top 5 reasons of startup failures. And tech startups remain behind for various reasons: they created a generic product or of low quality; a software product is less efficient than its counterparts; project development took too long or started behind schedule. As you can see, it’s vital for a startup to create a quality product, taking into account market trends and analyzing competitors. About 90% of medium and large companies do this in the USA.
Conclusion / tip # 1: Create a unique high-quality product,
considering what is already on the market. Add features that will be extremely useful and relevant to users. And do not forget to check its uniqueness. You do not want to become just a “copy-cat” company that repeated everything after "that successful one"?
Conclusion / tip # 2: Be sure to consider competitive advantages.
To provide tech startups a competitive edge, conduct Porter's five forces analysis. Analyze market competitors, current trends and alternative products. It will also be ideal if you create a unique business model for your startup.
Conclusion / tip # 3: Don't spend too much time creating MVPs.
On average, prototype development takes about 12 months. Its purpose is to test the idea performance, its functionality and demand. The less time you spend on MVP, the more likely your idea will be unique and gain a competitive advantage.
Reason for Startup Failure No. 5 - Unfriendly Product
Failures of tech startups also occur due to the fact that the authors of business projects specifically or not intentionally ignore the needs and desires of the target audience (TA). Therefore, it's very important to know and understand your consumer, clearly define their existing problem, and how your tech product will help to solve it. At the same time, your product should be developed exclusively focusing on the client and be easy to use.
Conclusion / tip # 1: Use a trial target audience and focus groups, create a system for collecting and analyzing user experience.
Bill Gates once said: “Your most unhappy customers are your greatest source of learning.” Therefore, you can create a successful high-quality startup product only by thinking objectively, focusing on your potential customers. To do this, test, tune and adapt the product without losing sight of the needs of your TA.
Conclusion / tip # 2: Explore your target audience.
While creating a product, shape up a portrait of a potential customer, up to the point that determine age, preferences, problems, as well as their financial and social status. Keep in mind what is already on the market and be sure to add features that will be extremely useful and relevant for users.
Reason for Startup Failure No. 6 - Product Without a Business Model
A weak business model or its absence causes the death of a large number of tech startups. A non-viable business model will not allow your good idea to succeed. You must be able to make your business project profitable or scalable.
A startup’s business model is a simplified view of the business, its source of income and the creation of benefits for consumers. A business model is needed:
- to evaluate and analyze the company's business performance in comparison with its counterparts,
- to assess how attractive the company's business is in the future,
- to optimize the business and maintain its value to consumers.
Conclusion / tip # 1: Pay particular attention to the business model and careful planning.
The development of your tech startup is critically dependent on the choice of a business model. Among many models, pick the one that suits your case the best.
For example, Professor Michael Rapp outlined such concepts of business models as brokerage, advertising, media, trading, manufacturing, partnership, community, subscription, and consumption. You can choose a business model from the above, but it is better to come up with your own.
Understanding the concepts of business models, you will be able to quickly adapt to market changes and, moreover, determine the growth points of your business project. Your startup will focus on the main components of the business: consumers, supply, infrastructure and financial stability.
Conclusion / tip # 2: Check your business plan with the Business Model Canvas.
This will test the idea of your business and see the problem areas. This tool allows you to show all aspects of your business project on the basis of nine blocks. Filling the Canvas, you will answer the following questions:
- Why will customers choose you?
- Who are your customers?
- How will your customers find out about your existence?
- How do you plan to communicate with your customers offline and online?
- Where does the money come from?
- What is necessary for your startup to work successfully?
- What exactly does your company do and what does not do in order for the business model to work?
- Who will be your main partners to achieve your goals as soon as possible?
- What are your financial needs?
The percentage of startups that fail is more than the percentage of Americans who use the Internet. The path to success of every technology startup is quite thorny.
During its creation, you will need to solve a lot of issues and problems, and quite often you'll have to make super efforts. We are sure that every startup founder endlessly believes in their idea. But in order for it to become a truly successful project, you have to roll up your sleeves and get your hands dirty. You need to research the market and the needs of your target audience, carefully plan your budget and choose the right pricing model, create a unique business model, and explore how your software is user-friendly. But, most importantly, you need to choose a reliable technical partner that implements your startup.