According to an extensive report by the Global Entrepreneurship Monitor, it’s estimated that over 50 million start-ups are created every year, a staggering 137,000 a day. When it comes to technology, there are at least 1.35 million new tech businesses launched annually, a number that will only grow. In fact, the world has seen a 47% surge in tech start-ups in the last decade.
It helps the fact that technology helps create technology: the increased number of SaaS available makes tech more affordable, accessible and quick. Today, almost any person with an entrepreneurial spirit can venture into tech, even if they don’t have technical knowledge themselves.
But it’s not all rabbits and rainbows - two out of ten businesses fail in their first year, and less than half make it to their 5th anniversary. There are several reasons why start-ups go down and, when it happens, it’s often due to more than just one cause.
It helps to keep an eye out for the basics - so here are the top reasons why start-ups fail:
- No market need
As confident as you might be in your idea, there is no point in building a product that nobody needs. It sounds obvious, but nearly half of start-up failures still happen because of this.
Thorough market research is the best way to establish the need for your product and analyse if the market is big enough to make it viable and scalable. Challenging your idea and validating the problem you’re trying to solve before building a solution is always beneficial: if you’re wrong, you need to find this out as soon as possible to avoid wasting time and money. On the other hand, if you’re on the right track, you can use the data to strengthen your value proposition and funding strategy.
By reducing uncertainty around an idea and ensuring the right product is built for the right market, you naturally increase your chances of success and improve investors' confidence that your business deserves their investment.
Founder and Lightning’s Discovery programme was designed for that. Discovery helps you validate both problem and solution, analyse the market landscape, run customer surveys and interviews, understand competitors, test assumptions, tighten your value proposition, establish a commercial model, define your team and turn you into a product-lead CEO.
- Flawed business model
Passion and motivation are crucial, but a great idea needs a solid and realistic business model to come to life.
Gaining customers might not always be as easy as Founders believe, even if the product seems great. The customer acquisition cost needs to be significantly lower than the lifetime value of that customer. A simple tip to help with your business model is to consider:
- Can you find a scalable way to acquire customers?
- Can you monetise those customers at a higher level than your cost of acquisition?
- Can you create a relationship with those customers to retain them long-term?
Picking the wrong revenue model, pricing structure or underestimating your costs are basic but common mistakes.
You also need to establish proper channels to create awareness, reach and deliver value to your customers - and remember to consider key partners and resources for mid and long term plans. After all, if your prospects don't know about it, your start-up won’t take off, despite how brilliant your product is.
In such a competitive landscape, the way resources are managed can make or break a start-up. Since they are less likely to be profitable initially, start-up Founders need to keep a close eye on cash flow.
There’s just so much time a company can run on early funds - even if you prepared well and succeeded in that first round, following your funding strategy carefully is vital to ensure you maximise the investment. Until your start-up is self-sustainable, watch your burn rate. If you fail to reach the next milestone before the money runs out, the company will be at greater risk of failing. If it still manages to raise more funds, it may have a significantly lower valuation.
Another common issue is obsessing over details and launching the product too late, which also risks the business running out of cash because costs keep increasing. At an early stage, the focus must be on getting the MVP out as soon as possible (even if you think it’s not perfect). After that, you can create feedback loops and then prioritise actions based on that, with short iteration cycles, to ensure your product is in line with user expectations - but the important step is launching it.
- Wrong team
Getting the right team, especially during those early days, is fundamental.
Employees with the right skills and experience hugely contribute to a start-up’s success. However, hiring the wrong team can quickly contribute to its demise as, by the time you realise where the problem is, it might be too late - especially at early stages when the budget is limited. Investing in a careful and reliable recruitment process pays off in the long term.
That’s even more essential on a senior-level. A weak management team might fail to focus on validating ideas before and during development, leading to a product no one wants to buy, poor execution (a build not done correctly or on time), and badly implemented go-to-market strategies. When there is a lack of shared vision, goals and objectives at the top, the issues inevitably trickle down to the rest of the team.
A lot of the issues are caused by not having the industry expertise the company requires - but knowing what senior management the business doesn't need is just as important. A tech start-up will, of course, need a technical team, but a CTO, for example, can come much later.
Finally, it’s necessary to look out for the entire team. The start-up mentality relies strongly on teamwork, from junior to senior roles. Overestimating the capabilities of smaller teams can risk burning them out before they manage to make progress.
- Bad product
A start-up might have a stellar beginning with a validated idea, great business model, competent management team and decent funds - but the final product needs to meet market expectations.
Technical issues can happen due to poor execution, but often the problem is strategic. When there’s not enough effort put into problem validation and MVP testing before and during development, the final product might simply not attract customers. If you get your idea out in the world and prove the existence of a market for it but then fail to meet its needs, rest assured that someone else will do it.
Early-stage start-ups bear the highest risk and have the highest failure rates. By considering the main reasons why start-ups fail, you can avoid basic mistakes and increase your chances of success. There is a chance that, as a Founder, the business you start with may not be the business you end up with. A good Founder needs to be persistent and able to adapt - such traits can ultimately help your company to succeed.