Startups

8 Reasons That Cause the Downfall of Most Web Start-ups

If you cannot market better, and cannot convey your product or service in a better way, you cannot out beat your competitors
8 Reasons That Cause the Downfall of Most Web Start-ups
Image credit: Shutterstock.com
Co-Founder of GoPBN
7 min read
Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

The term "start-up" has been trending since the birth of web-based businesses and has become the go-to buzzword on every entrepreneur's lips. Most entrepreneurs aspire to have their own start-up which will one day become the next billion-dollar company.

However, research from the Small Business Administration, released in 2014 states that only half of all the new businesses survive during the first five years while the remaining half survive their first ten years.

If we run the numbers, roughly thirty-five percent of businesses survive during the first ten years from their operational date. According to Forbes, eight out of ten start-ups fail within eighteen months of their launch date. A failure rate of eighty percent is alarming in the start-up ecosystem. Such numbers can discourage a lot of young entrepreneurs with aspirations to build the next billion-dollar start-up.

Investors, meanwhile, are left with the burden of the decision to weigh their financial risks against the potential of a start-up's groundbreaking idea. With over ten years of experience as an entrepreneur, I have seen many start-ups grow and fail including one of my own start-ups.

Based on my own experience running a game hosting startup based out of Los Angeles and its subsequent failure, I've identified seven major reasons why web start-ups fail and how you can avoid these mistakes.

1. No Growth or Option to Scale

Starting a business is actually easy, despite common misconceptions about time and expense. According to the Kauffman Foundation's estimate published on the Small Business Administration's website, all home-based businesses can be launched for as little as $1,000 to $3,000.

While most entrepreneurs start small, they tend to miss one big point: The potential reach of their business, and how much their company can grow.

With tools like Facebook ads, you can easily find out the total advertisement reach for a particular business category. Most of the entrepreneurs I talk to have no clue how to scale their business or up to what extent.

Reasons for My Failure:

I lacked the right infrastructure to run the business. After acquiring the initial client base through forums and free sponsorship servers, I had no clue how to reach more audience. Also, I dried out of cash to purchase additional hardware to support additional clients.

2. Lack of Product Research or a SWOT Analysis

Are you a young entrepreneur who just read the term SWOT for the first time? It stands for strengths, weaknesses, opportunities, and threats.

I often meet and speak with a lot of small business owners and young entrepreneurs. When I meet them, I often hear the same message: they can't generate sales and are facing failure.

When I ask for their SWOT analysis report, not only do they not know what I mean, they can't provide it because they have no clue how to make one. Just because you've built a product doesn't mean there will be an immediate demand for it. You need to take stiff competition into consideration. Proper research is vital to not only starting a start-up but also sustaining its growth.

In any case, before diving into forming your company, you should properly research the market conditions and potential for growth.

Reasons for My Failure:

Initially, when I found the opportunity, instantly I started working without in-depth research. The term SWOT was new to me. I never took the time to analyze my strength, weakness and threats. I was over-confident, about my target audience, their requirements and the market conditions with no correct data. And that led to the failure of my start-up.

3. Founders Quit Too Early

Most entrepreneurs today are impatient and do not care about their credibility in the market. They rush to start a business, and when the business starts to fail, they simply quit because their business hasn't generated any profits based on their arbitrary (and usually unrealistic) timeline.

This again aligns with the reasons stated above. Most founders quit because they have failed to do proper research about their business with no clue on how to scale their business for better reach by regularly seeking out more appropriate clients seeking the services or products they provide.

Reasons for My Failure:

I estimated to go beta in five months. However, due to lack of research, it took me ten months to go beta. Until then my partner and I had lost interest in the project and decided to drop, that cost us a fortune.

4. Lack of Communication with Customers

Selling a product is easy--retaining your customers is an art. One can master this art by regularly communicating with the customers.

Extra Mile: 500 Customer Service Tips for Success published by Tycho Press, states, "Even the most successful companies need their clients to be happy and to keep coming back for more."

Lack of adequate communication, perks, incentives, or discounts leads to clients ultimately abandoning the product or service.

Reasons for My Failure:

After the launch, my company got some sales, but the company failed to retain the customers. When the customers started leaving, I started emailing the customers.

While most of the customers weren't happy; one of the response is unforgettable, "It's been two months since I signed up, but I am hearing from you for the first time after I no longer wish to stay with your company."

5. A Business Built on Funding but Lack of Profits

Not everyone can be a billion-dollar Facebook, SnapChat, Uber, Lyft or Airbnb. According to Qz's research (based on Fortune), ninety percent of web start-ups fail because they fail to attract an investor.

As a start-up, you should try to bootstrap your initial project with other small projects. A calculative approach will result in a better financial outlook for the company, leading to a greater chance of survival. In the end, it's all about the numbers. If you can't generate enough profits, then you can only burn so much capital in the business.

It's essential to build a profitable business model right from the beginning with a fundamental understanding of market research and growth strategy.

Reasons for my failure:

Like any start-up, immediately after launching the beta, I started looking for an investor but found a lack of interest. My partner and I decided to bootstrap. The project took ten months (double the estimated time) and cost twice the initial projection.

As I failed to retain the customers, the revenue sunk that led to the closure of my company.

6. Never Outsource Major Development Projects

Most founders in start-ups are non-technical. Brilliant minds but cannot make the ideas go alive due to lack of coding skills. When your co-founder is non-technical, then you run into problems as you'll have to outsource the project. Outsourcing involves sharing of ideas and relying on someone else to turn your dreams into a reality.

Reasons for My Failure:

My partner and I come from a technical background. However, we weren't confident enough that we could build a massive dashboard ourselves. I decided to outsource the project to a development company with five years of experience.

Result? The project got delayed, the codes were sloppy and the dashboard was poorly built.

8. Your Competitors are Better Than You

Accept the fact that your competitors are simply better than you. If you cannot market better, and cannot convey your product or service in a better way, you cannot out beat your competitors. In my case, most of the competitors were already huge and had over ninety-five percent control over the market.

As Seth Godin says, "Marketing is no longer about the stuff that you make, but about the stories that you tell." If you can gather enough research, bootstrap your funds, build a superior product than your competitors with strong messaging and a story to tell, your start-up will be a success. You have to pay to make mistakes and learn from them. That's exactly what happened with me. Today, my mistakes have made me a stronger, better and confident person.

Whether you are an experienced player or a rising star, doing your homework is important before building your start-up. Having a fresh, innovative idea is great, but being realistic is equally important. Successful businesses provide a solution to people's problems with a financial reward. Once you understand the problem, find out if it can be scaled up. With solid research to support you, you can build the next billion-dollar company.

More from Entrepreneur

Elizabeth's expertise can help you scale your business, build a personal brand and focus on being a value-driven CEO.
Book Your Session

For a limited time only, get this bundle of Entrepreneur PressĀ® titles for less than $30 (60% OFF) on our bookstore when you use "LEAP" at checkout.
Buy Now

Are paying too much for business insurance? Do you have critical gaps in your coverage? Trust Entrepreneur to help you find out.
Get Your Quote Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.