The 3 Reasons why Most Startups Fail
We all know how glorified the entrepreneurial lifestyle has become in recent years, especially with the rise of social media and platforms like YouTube, which almost makes it seem that everyone is an entrepreneur running a multi-million dollar empire. However, it can't be farther from the truth. Due to how people portray themselves and their businesses you may think it's an easy task to do. In reality, 90% of new startups fail and we are here to explore the reasons to make sure that yours will be in the other 10%!
1. No market demand
Everyone of us has had many different ideas throughout the years. Maybe we had an idea of creating the next iPhone or revolutionizing the car industry. That's what entrepreneurs do, they come up with ideas and act on them but one crucial thing they miss is the market research to see if there's an actual demand for it.
Let us give you the example of TerraCycle a company, which produced a super food for plants made from worm poop. On paper it sounded great, 5 times more potent than the other products on the market, almost no competition, growing segment and a potential for exponential growth with high margins.
But guess what happened? They failed in the beginning, using loans and maxing out their credit cards to buy the machinery they needed without checking if people actually want to buy their product. They were forced to sell their assets without making a single penny.
Fortunately, they had a second chance in the form of winning a national competition and winning 1 million dollars of investment with their idea.
While they were extremely lucky not everyone can afford to go all-in and then lose everything. This is why it's important to go out and ask the people who you intend to target to get feedback on your product before you start producing it. We talk more about this in our article here.
2. Poor financial management
Over 29% of failed startups fail not because of the lack of money but the lack of proper financial management. What it means is that companies usually invest everything they have right from the get go without thinking for the future. They hope and expect that the market will react according to their business plan but reality shows that this is almost never the case.
To quote famous boxer Mike Tyson "Everybody has a plan until they get punched in the face".
This also rings true with some failed startups they have a plan but in that plan they don't predict failure, which makes them overextend and go all in on something that neither them nor the customers are sure about. This is why you shouldn't use all of your resources at once because if you do you have no room for adapting and by the time you do it might already be too late.
3. The Wrong Team
As much as the solo entrepreneur lifestyle is glamorized these days it's simply put not as effective. But not building a team you miss on on key insights as to how other people perceive the problem and also it results in worse decision making among other things. Statistics show that ventures started by a single person are much more likely to fail than from startups ran by a few people.
But just adding people for the sake of it is not enough. Creating a team is a delicate job that it's very hard to get right especially in the beginning.
On one side you might decide to start a firm with a buddy of yours with whom you are very similar and while it sounds great on paper, in reality it isn't, as you aren't benefiting from each other since you share a lot of the same views and idea preventing you from exploring new areas.
On the other hand you don't want to create a team of people that's too different because this will create a lot of infighting and conflicts.
Instead, what you are looking for is to create a team that is diverse and complimentary to each other. For example, one guy can be great at organization and the other at making sales pitches to potential buyers with both people being enough diverse to see different solutions to the problems but working together in the end.