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.
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:
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:
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:
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?
What to do:
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:
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:
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.
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:
Related to the market:
Related to the business:
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.
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Editor’s note: this article was initially published in August 2018 and updated in August 2020