Failure among startups is disappointingly pretty common. According to Forbes, 9 out of 10 startups fail, which is a hard and bleak truth that an entrepreneur and investor must think upon. A lot of factors are responsible for a startup to not work and almost every other startup faces these issues. So, what can be done to overcome these things? Well, a lot of analyzing, reworking and planning is required.
Gary Yamamura, a serial investor and entrepreneur with 20+ years of consulting experience shared his views on why startups fail and what can be done to overcome the challenges.
Let’s start discussing this in detail:
Startup failure rate:
As mentioned earlier, 90% of startups fail in the first 5 years of their establishment. Out of these 90, around 10% are out of business in the first year itself, whereas the remaining 80% lose the battle between their 2nd and 5th year. Statistics like such are not meant to discourage entrepreneurs and investors but to encourage them to work smarter.
Top reasons for startup failure:
- Product Market Fit: “A product that no one wants is bound to fail.” According to Fortune, 34% of startups fail to understand the needs of the market and create a product that is not needed. With companies like Uber and Lyft, commuting became easy, whereas Amazon changed how e-commerce works. Hence, it is crucial to understand if the product will actually help the people or not.
- Marketing: Despite the growth of digital marketing, a lot of startups keep it aside when it comes to their growth strategy. Even if they are doing marketing, it is not focused and lacks a marketing plan. No matter how great your product is, it is vital to leverage referrals, leads, and advertising. People will not know about your product if they aren’t aware that you exist and this is why marketing is vital for every startup.
- Team: Around 18% of startups claim that they failed because of a bad team. So, it can be rightly said that a team can make or break a startup. People management and running a team require a lot of continuous effort. A smooth and successful management requires proper understanding of team, leadership skills, and communication. Good ideas need execution and that’s where the team comes in. If the ideas are not communicated properly, then the team is bound to fail.
- Money: Finally, another important area where startups fall flat is running out of money. Cash flow is crucial for any company. A lot of startups begin with small amounts of money and as they grow, they need proper cost management. It’s easy to forget how much time it takes to pay back your initial expenses, let alone turn a profit. When it comes to cost management, it is also vital to have support when things are not going right.
When you look at all the above-mentioned factors, everything leads back to a root cause and that is: Management.
Businesses are run through decisions made by the management/leadership team, but if they are not competent, then eventually problems like money, product strategy, and marketing are affected. Now the question arises - how to know if a startups management team is bad:
- Lack of experience: Things like leadership skills, client relations, basic business tactics and team management skills are four most basic and important things to have. If your management team lacks any of these, then the road to success can be a tough one. A lot of first-time entrepreneurs lack these skills, and it can affect their abilities to communicate.
- Lack of planning: It is often seen that companies with clear mission and vision find it easier to explain things to their team as well as customers. Not only this, the management team must also know clear answers to questions like what product or service will you provide? Is it adding value? What are your objectives, and how will you attain them? Having a clear plan and roadmap provides a better chance of success.
Now that we have discussed the reasons for failure, let’s take a look at what can be done to avoid them:
- Proper documentation: This may sound cliche but having everything such as your plans, vision, financial forecast and mission documented can help sort a lot of issues. It helps in providing a clear path for your team to follow and also providing a reference.
- Spend like it's your money: Finance is a crucial aspect for running a business smoothly. Knowing the expenses, managing them and using them correctly are crucial. This can only be achieved if the team understands the value and outcome of investing each penny.
- Be honest: A pretty obvious thing a leader needs to follow is being honest. If you are honest, then you can discuss the issues with the team without any resistance and make better decisions.
- When things fail, take a step back: Often times moving forward is the only thing that’s on the mind of an entrepreneur. But when things are not going right, it is important to take a step back and assess if you are going in the right direction.
- Think, replan and pivot: At every stage of your startup journey, it is vital to look at things you are doing. If they need restructuring or replanning, then it must be carefully thought and executed.
About the speaker: Gary is a versatile senior advisor with superior communication skills and extensive knowledge and experience in developing, introducing, and ongoing management of advanced technology products and related services. He also has hands-on experience in program management, project management, operations management, training, and process streamlining through automation and re-engineering.