Let’s stop for a minute and look outside the spectrum of the Flipkarts and Ubers of the world. There are plenty of documented start-up failures — and many, many more undocumented ones.
The Indian start-up ecosystem has roughly 19,000 technology-enabled start-ups out of which only eight are in the elusive “Unicorn” club.
Only about 10% of start-ups will exist post the 5-year mark – over 17,000 of these companies will be non-existent by the year 2022.
Why is it that so many ground-breaking ideas by brilliant minds crash and burn so quickly? Here are some of the main reasons why start-ups fail.
No Business Plan
“I’ll get a million users, hit tipping point, and take over the world” Raise your hands if you’ve met an entrepreneur with this mindset.
The world watched in awe as companies like Facebook and Whatsapp raked in massive hordes of users in record time, and built these huge communities we so deeply admire.
Even if a start-up’s idea relies on building a user base – just that “idea” on its own is not a business plan. A business plan is built on several metrics, which includes traction, revenue model, points of failure, funnels, user acquisition, retention, growth metrics, marketing channels, and financial management.
So here’s a lesson in Start-up 101: Make a business plan and validate it before placing all the eggs in the proverbial basket.
Many start-ups fail because they try to scale too early. The first order of business is to figure out the product/market fit and until then, expenses need to be limited to necessities and essentials.
Burn rates have the tendency to shoot up pretty quickly, especially in the adolescent stage of the business because most start-up founders like to “chase the idea”. They are so heavily invested in the thought of being a runaway success, that they go full steam and bet everything on red.
Unless a start-up has an unlimited supply of funds – budgeting needs to be calculative and thoughtful.
Selling Mindset. Or Lack Of It.
In my opinion, the most important skill an entrepreneur needs to have is the ability to “sell”. Not just selling their products to generate revenue, but also the ability to sell their idea to VCs for funding, ability to sell their vision to employees for foundation, ability to sell their plan to friends and family for internal motivation. Herein lies the problem.
No one wants to be a salesman. That’s why the “selling mindset” is one of the least talked about topics in the start-up world.
Founders need to learn how to sell their product/service/idea or learn how to create a sales team that works like a machine and sells their product.
I’m not particularly fond of putting all the blame on luck, but sometimes the timing’s just not right.
An entertainment company, Z.com was founded just before the dot-com boom. Their idea was very similar to YouTube, and they even had initial traction with Hollywood talent on board and several VCs heavily invested. However, it shut down by 2003.
A year later, YouTube was born and they took over the world. The difference? Timing.
Z.com was founded in a time when computers weren’t built for watching videos and broadband penetration was low. By 2004, Adobe had popularized Flash for viewing videos, computers had become faster, video streaming was smoother, and internet was faster. All these factors gave YouTube a much higher chance of success because they launched at that perfect time.
Lack of Funding/Revenue
Even if a start-up has meticulously managed its expenses and only spent on essentials – if it runs out of funding and there’s no future funding/revenue in sight – chances are it will fail.
Lack of funding is rarely an issue in the early stages of the start-up unless their core product requires heavy investment just to create a MVP.
Many start-ups work on a month-to-month basis dealing with burn rates and growth expenses as they scale up. This is also a prime example of why start-ups need to generate profit from Day 1. Not only does it provide a “spend cushion”, profitable start-ups peak the interests of potential investors as well.
Inefficient Founding Team
Too many wantrepreneurs in a society which is increasingly accepting the “make it on your own” norm has surely led to massive growth – but has also led to many people who WANT to run a business but don’t know HOW to run a business.
Founders are the core of the business and no one will be as passionate about the idea as them.But it’s important for the founding team to allocate responsibilities and divide core management or advisory roles for each member.
The best start-ups are built on a strong management ladder that understands the business, appreciates the challenges, and follows a solution-driven approach to business.
Understanding and appreciating these reasons of failure is crucial, especially for virgin entrepreneurs who are looking to dip their feet in this vibrant ecosystem. Being an entrepreneur provides the flexibility of changing course and learning from past mistakes.
So here’s a toast to the fallen warriors – because of whom we’ve learnt what “not to do” to carve a better future for our start-ups.