We’ve all heard about the real-life fairy tales of entrepreneurs who started with nothing but a dream. Through determination and hard work, they changed the world with their ideas. While there are useful lessons that can be learnt from successes, there’s an entire faculty of knowledge to be gleaned from the stories of failure – a story that represents approximately 90% of all startups. We look at the top 2 reasons for failure and potential solutions to them.
Dropout rates and fierce competition
Regardless of the industry you delve into, the likelihood of your startup making it through the first four years of operations is pretty much 50/50. The reason for such stiff odds is the sheer amount of competition in the startup race. As of 2018, there are approximately 582 million entrepreneurs in the world – that’s 5% of the entire global population.
Why do they fail?
In a study of 10 failed startups conducted by CB Insights, the top 2 reasons startups cited as the cause of their failure is their failure to understand market needs and running out of cash.
- Failure to understand market needs
A lot of great entrepreneurs had to put up with an army of naysayers in the initial stages of their growth. While many would tell you to block out the negative noise and concentrate on making your product awesome, empirical data suggests the exact opposite. Gathering market feedback and understanding the difference between ‘nice-to-have’ and ‘must-have’ is imperative in your process of product development. Your product may be incredibly advanced with an amazing array of functions, but if it does not solve the inherent problems in the market, your startup is likely to fail.
Gather information about the industry of your potential business by looking out for the latest trends, and comparing industry data and growth statistics. Use the data to determine if the industry is yearning for new developments and technology, and if your product is relevant to the industry’s needs.
You should also conduct thorough market surveys to identify key consumer characteristics of the different territories that you hope to launch in. Gauge the kind of revenue you can expect for your business, and develop sales forecasts and business models accordingly.
Lastly, identify possible competitors and opportunities for collaboration. Keep a close watch on your competition by analysing their strategies and operations. Obtain their annual reports and scan through their company blogs if necessary. Use the information gathered to ensure that your product is well differentiated.
- Running out of cash
Roadmaps and forecasts can only do so much. Many startups find themselves running out of cash before their product even takes flight due to ‘unforeseen’ delays in their execution timeline. When starting your own business, you need to understand that almost nothing will go according to plan. Expect delays to your initial plans that will use up more funds than what was initially intended. The trick to surviving cash flow problems is not to avoid running out of cash, but to adopt the necessary measures when the money pool runs dry.
Weigh out your options, which in most cases boils down to two – getting more money from your existing investors or getting more money from other investors. Before you go out to request for additional funding, make sure that you have done whatever you can to reduce expenditure by streamlining business processes or reducing salaries through pay cuts or retrenchment. On top of that, you may want to consider re-establishing your company’s credibility by re-telling the story of your company’s growth and highlighting more recent achievement milestones.
Now that the preliminary work is done, you have a few options when it comes to approaching existing and new investors. You can request for a bridge or extension based on your last valuation from your existing investors. If they have strong faith and belief in your product, they may be agreeable to such a proposal. Alternatively, you can lower the valuation cap of your business and raise a convertible note based on the revised valuation. The last and least favourable option is to enter a down round.
Even after you have tried all you can to keep your company afloat, shutting down your business may be unavoidable. Success is never guaranteed. Lick your wounds and learn from the things that went wrong. What’s important is that you don’t give up and keep trying. Who knows? Your next idea may very well change the world.