Early-stage warning signs of startup failure

As an entrepreneur and startup founder, you have faith in your new business. You believe that investing time and effort into developing your idea, going to meetings, putting together a team, pitching to investors, and making a lot of sacrifices will pay off and your business will be successful.

The reality is that 90% of startups fail, 10% of which during the very 1st year and 70% during years 2 to 5, according to Failory’s 2020 Report. Indirectly, this statistic emphasises how utterly bonkers one must be to still go ahead and found a startup against all these chilling odds.

Pursuing the dream to turn an idea into a prosperous business is paved with unexpected events. In most cases, early-stage warning signs of startup failure are almost invisible, especially for those inside the whirlwind called “building a startup”.

The main reasons why startups fail revolve around the product, people, and money. The in-depth analysis conducted by CB Insights on 101 Startups Postmortems revealed that there’s hardly ever a single reason for failure, but rather a multitude of factors that amount to the eventual demise of a business.

After going through the top 5 reasons why startups fail, as identified in the above-mentioned research, we’ll take a quick dive into our own experience with a dear startup we’ve built a while back and which, despite our best efforts, succumbed in its 2nd year.

Top 5 reasons why startups fail

1. No market need

As CB Insights concluded, a staggering 42% of startups fail because they did not solve a market need.

But what does that even mean? Basically, it means that people have no use for what you are building. It might seem cliché, but many startups fail to build a product that their target market actually needs and wants.

One of the traps founders fall into is that they assume they know their customer base, without really putting in the effort of validating the assumptions.

Another common pitfall is to start from a need that founders identified - in their own companies or other interactions - and are confident other similar companies share that same need. They start building the product, they put together a team, try doing sales and, after a while, start hitting bumps along the way.

Understanding customers is an in-depth process that many founders skip - knowingly or not - or simply can’t find a way to structure properly. Failure usually emerges because you live in an adrenaline-fuelled, hyped-up, fast-pace startup world where time is never enough. Realising you don’t know your market is a clear sign of early-stage startup failure. Before moving forward with your MVP, you should answer the following questions:

1. What problems are my customers facing?
2. Do they have any fears about trying out my product?What might these fears be?

Poor communication with customers, not listening to them, ignoring their feedback and criticism are signs you need to change your strategy. It doesn’t matter that you think your product or service is amazing if they think otherwise.

What to do: 

• Know your target market, ideally before embarking on the startup journey. Find a way to connect with them on a deeper level, to get to understand what motivates them, their needs, their pain points, and what the ideal solution looks like for them. A good method is to conduct customer development interviews and to apply root-cause analysis techniques such as asking the 5 WHYs.
• If you’re already going full-steam ahead and realised you don’t know your market, take the time to provide excellent customer support. Set-up communication channels across social media and your website, and monitor everything they’re saying - the good and the bad. Keep customers updated with changes you plan to implement and encourage feedback. Make sure your account managers are on top of the situation and don’t miss any early signal that a customer is struggling.

2. Ran out of cash

This happens to startups regardless of their funding being in the order of thousands or millions of dollars, so it’s the 2nd most common reason why startups fail.

Having money does not guarantee success. What does make a difference is having an experienced executive team that can make sure spendings don’t get out of control, especially after closing a big round of funding. To make matters even more complicated, it’s critical to not spend too much money too early, but playing it safe is not the solution either.

An early-stage sign of startup failure, in this case, would be if you, as a founder, don’t know exactly what your key financial metrics are.

What to do:

• The best path is to have a very strong long-term plan that will keep you focused. Keep revisiting your development roadmap to check what functionalities are coming up and validate with your customers that they are (still) useful to them. This way you don’t spend money developing features that nobody needs.
• Don’t let vanity derail you. It would be great to move into a bigger, more luxurious office, but base your decision on analysis and metrics, not feelings.
• Keep in mind that money is volatile and can disappear through the cracks. Keep a close eye on cash flow and important financial metrics so nothing can take you by surprise.
• Have contingency plans and, once in a while, make a worst-case scenario analysis with your team and make a pivoting plan that can be swiftly deployed if certain triggers are activated.

3. Not the right team

Beyond every thriving startup is a successful, competent team, where a blend of skills and complementary personalities meet.

However, most entrepreneurs fail to realize in due time that their team doesn’t deliver on their promise. How does an inexperienced team drive a startup into the ground?

• They’re not focused on building a strategy, but rather on building a product (that nobody wants).
• They fail to validate ideas.
• They can’t execute.
• They lack transparency and fail to create a culture of trust.

What to do:

• Foster a culture where learning through failure is encouraged.
• Surround yourself with people with different skill sets, with different backgrounds and desire to learn continuously, who aren’t risk-averse and who are not afraid to speak their mind. As a founder, you should rely on your team to challenge your ideas and help you make better decisions.
• Make sure you have all the skills you need in the team (internally or externally). Some startups failed because they didn’t have a CTO to validate the technical decisions or a CFO to keep all financial aspects under control.

4. Get outcompeted

A brilliant idea, a dream team and the right influx of cash still can’t guarantee success. It’s equally important to be aware of what your competitors are doing. What if a competitor took your killer idea and implemented it in another way? The key is to be prepared and even expect such moves from your competitors.

What to do:

• Be honest when making your SWOT analysis and constantly push for improving what needs improving.
• Emphasize what makes your product different. Protect your competitive advantage and leverage it.
• Add value to your customers through secondary means: excellent customer service, flawless execution, impeccable UI/UX, etc.

5. Operations costs are higher than your revenue

Imagine your startup breaks through the market. Your customers are fond of your product and you’re getting the traction you’ve always dreamed of. But what do you do if all the subscriptions or fees you charge can’t cover employees’ salaries, let alone marketing and advertising? The first thing you might be tempted to do is to get the money from someplace else.

Regardless, what do you do if this scenario repeats itself? Eventually, you end up in debt. You realize that operation costs are higher than your revenue and that you can’t pay your employees. This happens quite often in the startup scene where founders are excited about getting their product out there, but they ignore the consequences. Nothing can prepare you for what’s about to happen. Although it may kill you to let your business go, getting “burned” is not a pleasant outcome.

What to do:

• Be open to change. Whether it’s your business model that needs to be changed, your product/service, your approach, the idea or even the pricing, if you want your startup to survive, some things need to be done differently. Furthermore, it might be a good idea to cut back on operations costs, even if that often means letting some people go.

Lessons learned after trying to build a startup of our own

Teamfluent was an ambitious startup our CEO founded in 2016, under the Thinslices umbrella. It was a learning management system, built to revolutionise how tech companies managed to create a learning culture.

The entire idea came to Ilie while trying to find a good tool to use within Thinslices to help organise learning, which is a core value at Thinslices, throughout the company. Browsing through an already crowded market of over 2000 LMSs, we couldn’t find a tool with the desired functionalities, the modern look and in the right price range. So, the natural question for a serial entrepreneur came up: why not build one ourselves? And we did.

Moreover, if we, a software development company, had a real need for a modern, swift LMS, it made sense to think that other tech companies needed it as well.

Soon after, a small team formed around Teamfluent, covering all departments: software development, sales, marketing, customer success, finance & admin.

The sales discussions were great, people liked our MVP, our functionalities roadmap and our business model. But it’s a long and winding road from discussions to actual contracts. Moreover, the clients we were discussing with were already using learning management systems inside their companies. So, although they liked our product, putting into balance the effort it would have taken to switch to a new tool - however better the new one might be - and the difficulty to gain wide adoption among colleagues, the math simply didn’t add up.

After 2 years of enthusiastic and hard work, with numerous tech customers, we decided to end Teamfluent’s journey, not without important learnings.

Lessons learned

We realised that, although the team had the right skills, the product created a good impression and we managed to have a good process set in place, we had the following oversights:

Related to our product and our target market:

• we had been too confident that tech companies needed our LMS the same way we did;
• we did not factor in the struggle a company has to go through if a decision to change a tool is made;
• in the culture - people - process - tools pyramid, we could only influence the latter. We were building a tool that would be used by people, to enhance a process inside of a culture that we could not influence.

Related to the market:

• with thousands of competitors, it was harder than anticipated to make an impression;
• almost all the companies we discussed with were already using one or more learning management systems with less than satisfactory results. Despite their dissatisfaction, the huge undertaking represented by making a switch discouraged such initiatives;
• our first big customer was a huge thing for us and we instantly felt compelled to develop features in the platform by their request. This made an impact on our initial product roadmap, impacting timelines, budgets, shifting priorities and even team composition (more features in short periods of time meant adding several software developers to the team).

Related to the business:

• We underestimated the effort needed for Customer Support. We knew our product by heart but our customers didn’t. It might not be obvious for many of us but rolling out a new product takes a lot of time, it doesn’t happen in one swift move, it is a phased effort and it involves many resources.

Takeaway

From the outside, failure is tough to diagnose because most entrepreneurs are focused on building things people don’t realize they need (yet). When your aim is to build an empire, it’s natural to feel powerless at times.

The reality is you can’t control everything, no matter how hard you try. You’re busy acquiring users, adding features and, basically, wearing several hats within the business.

Closing that first deal gives you wings, vanity metrics might give the false impression of exposure that can sometimes be mistaken for business growth. So many things accumulate that it’s easy to become deaf to failure’s gentle knocks on the door. But make the effort of sticking your head out from time to time to notice the warning signs.