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Why do Startups Fail?

Posted on August 04, 2020 by Saumya Omer  | Academics | Blog

Every day brings forth a story of another startup receiving a valuation of hundreds of millions of dollars of valuation. It’s fairly easy to get mesmerized by the charm of the startup world and the glamour of being an entrepreneur. However, as much as these success stories are broadcasted, startup failures are equally under-reported.

In its analysis of startup failures post-mortems shared by startup founders, CB Insights tried to ascertain the causes behind why startups fail and posted the top 20 list of reasons.

Five among the top 10 were undeviatingly linked to customers - from ‘user-unfriendly product’ and ‘poor marketing’ to downright ‘ignore customers’. The largest share of the pie - a whopping 42% - was seized by ‘no market need’, which when translated to layman terms implies that there were no customers for the product in the first place. Kolos said it - ‘We did a lot of things right, but it was useless because we ignored the single most important aspect every startup should focus on first: the right product.’

Furthermore, most startup founders repented not listening to their customers when they should have. The founder of GameLayers observed about clearing prejudices to “make something easier to have fun with, within the first few moments of interaction.”

While almost 50% of the reasons attributed to customers, nearly the same number indicated organisational issues, with not having the right team onboard winning the crown. The Standout Jobs team said it all in their company’s post-mortem, “The founding team couldn’t build an MVP on its own. If the founding team can’t put out product on its own, they shouldn’t be founding a startup.”

Additionally, getting sidetracked and losing the passion with which the startup was originally founded formed a big chunk of the reasons for startups doom. External factors like discord between the founding team and investors can also make things pretty unpleasant pretty quick, as was the case with ArsDigita.

Contrary to the popular opinion though, only two of the top 20 reasons were related to money and lack of funds, and those too, when dug deeper, percolated to not understanding the market. When viewed per the business ecosystem that's all about human trials, this isn’t entirely a revelation since most of these domains are about getting the right people in the right place - both internally and externally.

No matter how good an idea, if the internal team lacks interest in the domain, it is bound to result in customer negligence and a faulty product. The founders of NewsTilt, a news website, confess, “We didn’t care about journalism, and weren’t even avid newsreaders…And how could we build a product that we were only interested in from a business perspective.”

The findings, though in no way exhaustive, should serve as a cautionary sign for aspiring and growing startup founders to align their priorities right. People are the drivers of growth - external (customers) and internal (team). Consequentially, ignoring them is sentencing your startup to failure by choice.

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