A startup looking to become a profitable, fast-growing scaleup company isn’t your standard small business.
Startups are a completely different breed of business, and the vast majority will fail.
Some will completely sink, and others will simply fail to transform into scaleups that see a return for their investors.
There are a host of factors that determine why some startups become rising stars and others are doomed to failure.
For each industry and entrepreneur, the reasons can be varied, however, there are some common themes that can make a difference.
Top 10 Reasons Why Startups Fail
- Failing To Implement A Scaling Strategy
This is the biggest reason that startups fail. What separates a startup from a standard small business launch is the idea that it will become a highly profitable scaleup. A startup should be a company that investors favour and that will result in good returns.
Startups by their very nature are risky ventures. Fear and overcautiousness often result in startups failing to scale. You’ve got to spend money to make money and take necessary risks. Being too risk-averse results in missing your window. This leads to stagnation and a lack of growth. Once a company has stagnated, it is very hard to get that momentum back.
Without a clear scaleup strategy, implemented at just the right time in the right way, even great startups fail. This is because demand for their services increases, yet they lack the resources to be able to keep up with that demand.
They fail to invest in more staff, resources, and operations management at the right time. If they cannot rise to meet the demand, the interest will soon drop off or competitors will steal the idea.
Competitors can learn from your mistakes and do a better job. The demand generated from your good idea will make an easy target audience for those competitors to poach. That is why startups must be ambitious with their scaling.
2. Scaling Too Soon
Of course, the big problem that all startups face is knowing precisely when it is the right time to start scaling. Just as missing the window is a major issue, so is scaling too soon.
Trying to scale too soon results in large cost outgoings with not enough coming in, and no guarantees that the strategies will bear fruit.
By hiring staff too soon, startups increase their outgoings before revenue is guaranteed at sustainable levels.
3. No Market Research Or Testing
You think you have a great idea, and so do your acquaintances, however, investors and your target audience disagree. Or perhaps, it could be a brilliant idea, but you’ve been barking up the wrong tree with marketing strategies that don’t resonate with the right audience.
Market research and testing are essential before scoring Series A, B and C funding. You should be certain there is a tappable market for your idea before proceeding at all with a startup.
4. Inflexible plans
This is one of the biggest killers of any new startup. Startups and scaleups by their very nature are experimental and must pivot to maintain successes and growth. Sometimes new startups are so fixated on the entrepreneur’s plan and projections of how things will go that they ignore real data.
If you aren’t willing to learn and pivot your strategy quickly, you will fail.
5. Poor Pitching / Unclear Funding Aims
When would-be entrepreneurs have a poor understanding of funding, and investors, they set themselves up for a challenging road. A thorough comprehension of funding cycles is crucial in both a startup and scaleup.
Insights into the different types of investors will aid entrepreneurs in making the right choices for their particular objectives.
On the flip side of this is the ability to explain their projections to investors. In order to effectively pitch to investors and access funding, startups must have a good business plan on paper.
That’s not just an inspired idea, but a step-by-step plan to show how those funds will properly be applied at each stage and how this will yield results to hit certain necessary targets.
6. The Business Isn’t Unique Or Special
With a standard small business, it doesn’t always matter if your product or service idea is unique. As long as there is adequate demand and/or you can offer a better deal or quality than competitors, you can do well.
With startups looking to rapidly scaleup and make a huge profit, it is different. To impress investors and score the funding that will get your ideas off the ground, you must be somewhat unique.
That’s because first of their kind ideas implemented well can take over a whole market. Look at Facebook, Google, Airbnb, and other market dominators.
If the market is saturated and your idea has no edge over competitors, it will be dull to investors.
7. Focusing On The Wrong Short Term Metrics
Vanity metrics are a pitfall for any business, for example focusing on social media likes that don’t drive sales. In a startup it can be even more complex.
Often, you might be working to generate ‘buzz’ before a product or service even launches.
Sales alone might not be a solid indicator of long-term success. This makes metrics harder for startups. Once again, a clear plan and insight into the target audience is crucial. Is there pre-existing demand, or do the audience need educating on how the business can help them in ways they had not imagined?
The key solution is to track metrics that generate some kind of action in the audience. The startup staff must then have a plan for how that action leads to profit.
8. Poor Financial Planning
Naturally, this, more than any other mistake, is the death of startups. Even the best ideas fall down because of poor financial planning. The mistake is easier to make than many entrepreneurs think. This is because there are always more unseen costs in doing business than you believe.
One common unseen cost is your workforce’s hardware equipment. In the digital age, entrepreneurs often do consider the importance of software, but not hardware.
Once a startup begins looking at how to scale, some of the shortcuts of their early days will no longer work. A big jump is often moving from freelancers to a full time employed staff with clear roles as you scaleup. Those staff are entitled to and require the latest hardware to do their jobs well. IT hardware for your whole team is expensive and technology is updating and changing all the time.
Device leasing is one such financial strategy that can save startups and scaleups a huge amount of money and logistical headaches. Automation software is another technique that can cut out large amounts of needless manual tasks and jobs.
9. Unnecessary Overspending
Even in the wake of adequate financial planning, unnecessary overspending burdens startups. The reason is because ‘nice to have’ and ‘must have’ are very different. As innovative, risk-takers themselves, entrepreneurs are frequently easily led by a great pitch.
A piece of analytical or automation software or company culture elements might seem essential, however, directors must step back and really access whether that purchase will achieve a necessary goal in the short term.
10. Poor Leadership
Overworking staff or spreading them too thin to make funds go further is one of the signs of poor leadership. Others are hiring people without vital skills to save money on their salaries.
Other signs are a lack of decisiveness on vital strategies, failing to listen to heads of department and not fostering a good chemistry within your team.
Startups and scaleups are entrepreneur-led. Some entrepreneurs have both the inspiration and the logistical, financial and operations sense to set out a workable and ‘scaleupable’ business model. Others have the foresight to see their skills deficit and have a good eye for bringing in the right talent to fill those gaps. If an entrepreneur lacks both of these, they are probably a poor choice for a leader, and that is a major flaw even if the business idea is golden.
Plan Your Startup’s Scaling Strategy
To avoid most of these mistakes, startups simply need a great business plan. This should cover everything from device strategies and scaling strategies to clear financial and operations plans with enough rooms for change.
There are plenty of business planning templates on the market for prudent entrepreneurs.
One of the simplest outlines consists of identifying a problem. Most successful businesses solve a problem that many people have whether they are aware of it or not. Entrepreneurs should research the existing alternatives, provide a solution that adds value and cannot be easily copied by competitors.
Next comes outlining key metrics of success, identifying the target audience and how to effectively reach them with marketing.
This along with clear ideas of revenue streams and the cost structure of the business is a good start.