Startup is a risky business. Almost 90% of the startups fold within first year of starting up and probably less than 1% really achieve their goals in terms of growth, value and market impact. While there are many reasons why a startup could fail, we have tried listing some of the common reasons why most startups fail.
Founding team conflicts
Conflict amongst the founding team/top management is one of the key reasons why startups fail. If most of the founders’ time is spent on arguing with each other rather than about the product, then its probably matter of time before the company shuts shop. In case of such conflicts it is best to discuss the issues with a calm mind. If this is not possible, it is best to involve a mentor/adviser. This could be a senior member of the board, a common friend, company investor etc. If things don’t workout still, then one must look at ways to see if one of the founding team member can exit the company (assuming that the company can still function with one founder leaving).
Running out of cash
Bad financial management is another key reasons why startups fail. In the article Common financial mistakes that startups make we try to highlight some of them. Entrepreneurs, by nature, are frugal. As much as possible, run a lean startup. Only make an investment when it is absolutely necessary. If you do get to a point where you are totally out of cash, there are few options with you.
- Raise more money
- Bootstrap your startup
- Cut cost (run a lean team, small office, etc)
- Try and sell your company in whole or in parts.
Of course, if all else fails, you have to shut shop and probably look for a job!
Bad Investors
Investors who have no clue about your business can be a BIG reason why startups fail. An investor may have a majority in the board, can fire the founding team, prevent a strategic acquisition or push through a bad sale. He/She can appoint a professional CEO and sideline the founding team. Of course it is difficult to figure out these things in advance but before selecting an investor look at other businesses they have funded and try to get some feedback from those startup founders about the investor.
Burn Out
Team/Founder burn out is a common reason why startups decelerate, get demotivated and ultimately fail. There is hardly a concept of work-life balance in a startup environment. This can take its toll on relationships, health and general well being. Sometimes even a vacation or a break does not help get out of a burn out. If one is stuck in such situations, its best to see possible ways to exit (appoint a team to handle the operations/business, sell the company or simply shut it down). Often the burn out does not end with the departure from the startup. It can last for a few months post exit.
Not working on it full time.
While it is perfectly alright to start a company/idea as a part time activity. However, sooner or later the founding team must take the plunge and go full time with the startup. Startup job is hectic and cannot be clubbed with another full time job. Team members are not able to give their best in such scenarios and progress becomes slow. Also the comfort of a guaranteed pay cheque at the end of the money means there is no motivation to show sense of urgency. Decisions get delayed, meetings get postponed and sooner or later the team members start showing lack of interest.
Most of the times there is no proper feasibility study done by the entrepreneurs that how much time it will take for the company to become profitable or stable..hence as all the times lines get delayed, pressure builds and leads to the down fall of the company.
More than anything else, startups fail because of poor strategy & planning. Despite the best of the product idea, startups fail because they have no clue around how to scale their business.