Why Do Start-Ups Fail?

Start-up seems to be the buzzword in the business and finance rounds. At an unprecedented rate, the number of newly established businesses boomed. It’s amazing how these start-ups are able to pull in a lot of dough. However, what baffles many people is how, even with such outsized amounts, these businesses aren’t able to make all that moolah work. Why do start-ups fail?

But first, here are the stats according to the financial website CBInsights.com.

Did you know an estimated 70 percent of newly established tech companies fail within the first 20 months from the first raising of money? The usual total funding reached before the tech start-up closes is about $1.3 million.

The statistics are even more brutal in consumer hardware start-ups. Did you know around 97 percent of these crowdfunded companies become “zombies” then eventually die?

So why do the start-ups conk out despite their access to a lot of dough? It’s hard to imagine seeing all these companies in the business obituaries despite having all that money. Would you believe the second top reason is that they simply “ran out of cash”?

Analysis from the New York-based business market research group CB Insights revealed that running out of cash accounts for about 29 percent of start-up failures. It ranks second only to no market need, which leads the start-up mortality causes at around 42 percent.

1. No Market Need

Problems are common when running a business. But there is virtually none bigger than having no customers who are interested in the products, services, or business model one is pitching. It’s difficult to tackle this challenge since it goes into the core of why the business existed in the first place.

Where people don’t want or need what the business is offering, it can be a large enough problem with no universally scalable solution.

2. Running Out of Cash

How a business handles its finances can greatly determine its longevity. After all, money is a finite resource that needs to be judiciously allocated and spent wisely. Reckless spending without a corresponding proportionate money inflow will create problems for the business. Thus, failure to find the right product-market pivot will eventually result in depleted finances.

Wrapping up the top 5 reasons for start-up deaths are the following:

3. Not Getting Into the Right Team

Having a diverse team composing of individuals with different skill sets is critical to business success. Each team member contributing to the greater whole is what start-ups are usually about. But where the team cannot work harmoniously, this can jeopardize the group dynamics.

Some start-ups usually make the mistake of bringing in additional cofounders, compensating them generously with whatever limited cash the company has. While good-intentioned, it is lamentable that this recourse often results in internal discord.

The underlying problem usually lies in not having a partner in the true sense of the world. Team members should act as partners to one another, providing sanity checks and balancing out every business decision that each one makes. More importantly, each team member must support one another, creating an atmosphere of encouragement and positive reinforcement.

4. Getting Outshot by Competition

Many start-ups fail to take notice of the current competition as well as the new entrants in the business space. There may also be trends that tells a lot about consumer behavior, affecting business viability.

While over-obsession won’t do good to the business, not paying attention to the competition and the whole market landscape can be equally deadly.

5. Cost and Pricing Issues

There is a fine line that businesses tread when pricing their products or services. Price it too high and there will be little to no customers. Price it too low and the business won’t be able to have enough to cover. It’s a delicate balance.

Running a start-up? Are you making these fatal blunders?

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