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Common Reasons Why Startups Fail

Whether a startup makes it or breaks it within its first year determines its ultimate success.

While the reasons for a startup’s success or failure can seem elusive, they usually boil down to simple things you can do before your product or service even goes to market. According to a CBInsights.com analysis, most startups fail for one or more three main reasons.

Let’s go over those reasons and how you can avoid them so that your startup is a success!

The Wrong Team

The people who you have working on — and in — your startup are a key factor in its ultimate success. According to the CBInsights study, not having the right team contributes to 23 percent of startup failures. This included situations in which the founding team wasn’t able to handle the workload on their own (or with minimal help from outside contractors). That’s one reason that versatility among your team members is key. However, a successful team goes beyond their skill set: They have an entrepreneurial mindset that allows them to “roll with the punches.”

Everyone on the team must be comfortable with shifting goals and needs and be able to adapt their skills to any situation.

It’s also likely that having two co-founders makes a startup much more likely to succeed,  because it prevents anyone’s perspective from defining the overall scope of the business. This can lead to tunnel vision that limits the startup’s ability to attain a following.

Not Enough Cash

Many startups simply run out of money. The first year, you should expect to be in the red, but your financial plan should allow you to recoup your costs by the end of year two. Moreover, you need to be in a position where you can raise more money — and that means passing milestones that make you more appealing to investors, such as a certain number of customers or the elimination of a major risk.

Too often, startup founders assume that time spent in business closely correlates with the value of that business. However, many more factors go into this valuation, including the cost of acquiring customers, the rate of customer adoption of your products or services, and demonstrable profitability. It’s unlikely that you’ll be able to run the business solely on profits for the first two years, so being in a position where investors want to invest is crucial to your eventual success.

No Market Need

The ultimate goal for a startup — to meet a market need — is tied to the number one reason for startup failure. If the product or service is not needed, the startup will fail. If it doesn’t fit the market in terms of price or target audience, the startup will fail. If the market is oversaturated and the product or service being offered can’t stand out, the startup will fail. That’s why it’s crucial to do extensive market research before going to market. Many failed startups simply didn’t listen to prospective customers; they focused on what they thought was important rather than what actually was important to customers.

Wrapping Up

Based on these failures, to ensure your startup’s success, there are a few simple steps you can take. First, build a strong, versatile team with whom to launch your startup. Look for adaptability, passion, and a collaborative spirit, rather than people who are just there to do the job or who tend to “silo” themselves into certain roles. Second, build safety measures into your financial plan so that you can buffer against unexpected setbacks or slow starts. Also, set clear milestones to achieve to increase your appeal to investors at each stage in your growth.  Finally, conduct extensive market research — even more than you think you might need. Closely evaluate the market need and timing for your product or service, as well as the success and rates set by your competitors. Find ways to fill any gaps left by your competitors, and tune your marketing into customers’ needs rather than your idea of what makes your product great. Be sure that you are gaining customers’ feedback, whether through surveys or even a trial/testing period of the product, before you go to market.

By following these best practices, you’re much more likely to be one of the 10 percent of startups that succeed. Do your homework, make careful plans, and check your ego. While there is no guarantee of success, taking the necessary steps to align your business with market needs and assemble all the tools and resources that you need to scale up will bring you much closer to the reality of having your dream company be a hit.