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5 Reasons Startups Fail
Reason 1: Market Problems
A major reason why companies fail is that they run into the problem of their being little or no market for the product that they have built. One of the parameters can be that there is not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing.
Good sales reps will tell you that to get an order in today’s tough conditions, you have to find buyers that have their “hair on fire”, or are “in extreme pain”. If you’re business is failing, you also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have).
The market timing is wrong. You could be ahead of your market by a few years, and they might not be enough solution at this stage. It might also be that the market size of people that have pain, and have funds is simply not large enough.
Reason 2: Business Model Failure
As outlined in the introduction to Business Models section, after spending time with hundreds of startups, I realized that one of the most common causes of failure in the startup world is that entrepreneurs are too optimistic about how easy it will be to acquire customers.
They assume that because they will build an interesting web site, product, or service, that customers will beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV).
The observation that you have to be able to acquire your customers for less money than they will generate in value of the lifetime of your relationship with them is stunningly obvious. Yet despite that, I see the vast majority of entrepreneurs failing to pay adequate attention to figuring out a realistic cost of customer acquisition.
A very large number of the business plans that I see as a venture capitalist have no thought given to this critical number, and as I work through the topic with the entrepreneur, they often begin to realize that their business model may not work because CAC will be greater than LTV.
Reason 3: Poor Management Team
An incredibly common problem that causes startups to fail is a weak management team. A good management team will be smart enough to avoid Reasons 2, 4, and 5.
Weak management teams make mistakes in multiple areas; often weak strategy, building a product that no-one wants to buy as they failed to do enough work to validate the ideas before and during development.
This can carry through to poorly thought-through go-to-market strategies. Those who fail are usually poor at execution, which leads to issues with the product not getting built correctly or on time, and the go-to market execution will be poorly implemented.
Those with weak leadership will build weak teams below them. There is the well proven saying: A players hire A players, and B players only get to hire C players (because B players don’t want to work for other B players). So the rest of the company will end up as weak, and poor execution will be rampant.
Reason 4: Running out of Cash
A fourth major reason that startups fail is because they ran out of cash. A key job of the CEO is to understand how much cash is left and whether that will carry the company to a milestone that can lead to a successful financing, or to cash flow positive.
What frequently goes wrong, and leads to a company running out of cash, and unable to raise more, is that management failed to achieve the next milestone before cash ran out. Many times it is still possible to raise cash, but the valuation will be significantly lower.
Reason 5: Product Problems
Another reason that companies fail is because they fail to develop a product that meets the market need. This can either be due to simple execution. Or it can be a far more strategic problem, which is a failure to achieve Product/Market fit.
Most of the time the first product that a startup brings to market won’t meet the market need. In the best cases, it will take a few revisions to get the product/market fit right. In the worst cases, the product will be way off base, and a complete re-think is required.
If this happens it is a clear indication of a team that didn’t do the work to get out and validate their ideas with customers before, and during, development.