What is the biggest problem for startups?

LEAD Innovation Blog

 

Numerous startups fail with their business idea in the first few years. After more than five years, no more than one in ten is still in the running. There are many reasons why startups fail. Usually it is not just one factor that prevents success, but rather an interaction for several reasons. We present the five most common reasons in this blog.

 

1. Lack of market demand

No market, no cash. A study by CB Insight shows that more than 40 percent of the 101 shutdown companies examined failed because of the market potential because they had planned their product or service completely bypassed the market. Sometimes the market was not yet ripe or features were developed that were of no relevance to the target group and that the market therefore did not want.

The latter applies to the Austrian startup Woodero. The company was able to successfully raise the necessary capital via crowdfunding, but then failed due to the lack of demand for its wooden smartphone and tablet protective covers. Dave Sloan's startup Treehouse Logic, launched as SurveyMonkey for website configurators, also failed because Sloan wanted to solve a problem that was not relevant enough for customers to generate a profitable business model.

 

The importance of the correct interpretation of market research results can be seen from the Dinnr food delivery service. 70 percent of 250 respondents agreed that they would buy the product. The alpha test group and 1: 1 interviews also produced positive results. Nevertheless, founder Michael Bohanes screwed the startup because he misinterpreted the market research results. Bohanes only presented his idea, but it did not offer a solution to a customer problem or a relevant additional benefit. He interpreted the survey data as a market potential, while the respondents only expressed their general interest. In fact, there was no demand for such a delivery service.

 

2. Insufficient funding

Another important reason why start-ups fail is insufficient capital. Follow-up financing is often missing for the growth phase. The CB Insight study puts the proportion of companies that failed due to liquidity problems at just under a third (29 percent).

One example of this is the drone company Airware, which had to close its bulkheads a few months ago. Airware desperately sought financiers for 18 months before the company ran out of money and shut down. The startup wanted to gain a foothold as a pioneer in the field of commercially used drones. However, the market did not develop as quickly as expected from Airware. In addition, there were long development cycles and missing software features that competitors already had on offer. When Caterpillar left as one of the largest donors, the company lacked the financial resources to position itself successfully in the market over the long term. About 120 employees were out of work after the startup burned $ 118 million in funds.

 

3. The wrong team

Another reliable killer for startups are problems and inconsistencies within the team (23 percent according to the CB Insight study). If the team members don't work together, the startup doesn't have much of a chance either.

"The first five employees will make or break your start-up."

Oliver Holle, CEO Managing Partner Speedinvest

 

Often, however, an unbalanced composition of the team with regard to the competencies of the individual members also hinders the success of the company. Sometimes important skills for the technical implementation of the business idea are missing, sometimes there is a lack of a CTO who acts as an interface between management and the technical departments. The online job platform Standout Jobs failed, for example, due to a lack of professional skills. The team was not able to build an MVP (Minimal Viable Product) itself or with some external support from freelancers. The company could also have brought founders or external innovation partners with the appropriate skills on board, but failed to take this step and went bankrupt.

In many cases there is also a lack of management competence. The founder of the online platform Nouncer attributes the startup's failure to the fact that it did not have a partner who could balance it and provide plausibility checks for business and technological decisions. In addition, the startup also had massive problems finding suitable employees at the location.

 

4. Strong competition

In 19 percent of the startups in the CB Insight study were overtaken by the competition and forced to give up. A well-known example is Wesabe, a failed online personal finance management service that was outperformed by Mint. Mint analyzed the weak points of Wesabe's MVP and only launched their own platform after they had developed a better solution. This gave Mint, among other factors, the decisive competitive advantage. Because Wesabe was more powerful and offered more functions than Mint, but it was more difficult to use.

Another example of a company that has been overtaken by the market is Raptr. The company offered a social network for gamers and benefited for several years from the fact that the graphics card manufacturer AMD bundled the Raptr software with its graphics driver. When other game platforms such as Steam or Xbox gradually appeared on the market and the agreement with AMD was not extended in 2016, this sealed the company's fate. By then, investors had invested $ 44 million in the company.

Much more, namely around a billion dollars, was put into the company Jawbone Up, which launched the first fitness bracelet in 2011. However, one let the competition outstrip them. With the entry of Fitbit and various other manufacturers, the market became more and more competitive and the company's own innovative products did not generate enough demand. Eventually the company ran out of money.

 

5. Pricing and Costs

Further problems for many startups are the difficulty of calculating a price high enough to cover costs but low enough to attract customers. As many as 18 percent of the companies in the CB Insight study cited profitability problems as the main reason for failure.

For example, the startup Delight had the vision of developing a new type of mobile analysis: visual analysis. The most expensive monthly plan was $ 300. For this price, customers expected more. In addition, there was a poorly chosen billing model. The price was calculated based on the number of “recording credits”. Since the customers had no control over the length of the recordings, most of them were very careful about using up the credits. Pricing models based on the accumulated duration of the recordings would have made a lot more sense and increased the number of subscriptions.

 

6. Other factors

A bad core product and lack of a successful business model, incorrect innovation marketing or ignoring customer needs are also at the top of the list. The study shows very clearly how complex and multifaceted the causes of failure can be.

 

Conclusion: Use learning potential for your own projects

Startups, corporate ventures, and established companies can learn from the mistakes of other companies. FuckUp Nights are a way to tap into this knowledge potential. You can also read our article "6 things established companies can learn from start-ups" on this topic.