Why most startups fail

There has been an unprecedented boom in the number of startups around the world. Even in Sri Lanka, interest has been piqued, with greater participationof various stakeholders. The glamorisation of a once lowly-held profession and falling entry barriers have contributed immensely to this start-up explosion. Now, with the Government pledging supportand the emergence of numerous funds, accelerators, and incubators, the Sri Lankan start-up ecosystem is set to flourish. However, as exciting as it sounds, there is also reason for trepidation. Most startups fail-and along with them go wasted investments, broken dreams, and ruined careers. Even in an advanced market like the USA, close to 40% of startups do not survive past their second year. In the UK and other developed countries, the numbers are more disquieting. It gets even worse in emerging markets, where businesses are subject to greater uncertainty. For instance, IBM has estimated that around 90% of Indian startups fail within the first five years. Although there is no statistical evidence from Sri Lanka, one can expect a similar story, given the adverse market conditions. Accepting this harsh reality and developing an understanding of why most startups fail is imperative for all prospective entrepreneurs. This type of reflection enables them to be betterprepared andimprove their odds of success. So why do most startups fail? 

Market-related factors

Although running out of cash is an entrepreneur’s biggest fear, research has shown thatthe number one reason for start-up failure is creating products or servicesthat the market does not want or need. In 1960, Harvard professor Theodore Levitt coined the term “Marketing Myopia”, which he explained as a short-sighted inward-looking approach that companies adopt as opposed to focusing on the consumers’ point of view. 60 years later, entrepreneurs are still guilty of marketing myopia,launching products that do not solve market problems. Although in some instances it mayaddressthe customer pain of a few, the market segment may simply be not large enough. This is why it is essential to carry out research to develop a realistic picture of the market, and its precise needs. 

Imitating an existing product or entering a crowded market space is also a reason many businesses succumb. This is a pervasive trend in Sri Lanka-entrepreneurs often take inspiration from their competitors and go with a follow-the-herd mentality. While duplicating products may be an easier route to the market, startups never have adequate resources to sway customers away from first movers or dominant players. Startups can increase their odds of success by targeting niche segments, and gradually use that as a base to expand to adjacent markets. Consider the analogy of going to an area of thin ice that supports a start-up’s weight, but where giants and larger competitors are unwilling to go. 

Product-related factors 

There is a definite advantage in being the first mover in any category or industry. However being first is of no use if ultimately the product or service is of inferior quality or design. Alternatively, perhaps the start-up has prioritised on features whichdo not add real value to customers. Startups, unlike established firms have limited resources, and their success depends on bringing customers back for repeat purchases. Restaurants in Sri Lanka commonly face this issue; a first time customer who had a bad experience is unlikely to return, also contributing to negative word of mouth. In some instances, the business idea is innovative, but implementation is poor. In these cases, startups run the risk of a larger and more opportunistic competitor improving upon the idea and driving the innovator out of the market. Poor pricing, wrong location, inadequate marketing are all related factors. 

This is where adequate testing is essential. It is advisable for startups to build a minimum viable product (a barebones version of the product), test it with a sample group of early adopters, gradually add and improve upon it, before launching it at a large scale to the market. Many experts shun excessive perfectionism and delaying launches. However, launching a substandard product is a far worse sin. 

Entrepreneurs are terrified of failure and rejection, often testing their products with those who will only offer praise than criticism. Testing should not be done with friends and family, but those who are subsets of the main target segment, and who will eventually pay for the product. 

Cash-related factors

Cashflow is the lifeblood of any business. And while larger, established businessesmay have contingencies, running out of cash leads startups to an ineluctable demise. Cashflow problems actually start long before the start-up is launched, where the exuberantentrepreneur starts working on the spreadsheet. Inadvertently, optimistic founders overestimate the projected revenues and underestimate the expenses. In Sri Lanka, especially in the expenditure aspect, startups are faced with never-ending surprises once the business starts. Accountants often advise startups and smallercompanies to keep a minimum of 3-6 months of working capital, with the number depending on the industry. This makes greater sense in a market like Sri Lanka, where business can fluctuate seasonally and due to factors outside the entrepreneur’s control. 

Managing money issomething the stereotypical entrepreneur is not fond of. Given its importance, startups should have at least one cofounder with good financial intelligence, or spend well on hiring experienced personnel who will implement strong financial discipline. 

Entrepreneur-related factors 

Startups do not fail because they are startups. They fail because of the founders. Yet when things go wrong, entrepreneurs often look through the window and blame the economic situation, or the volatile nature of their business. Instead, they should look at the mirror and critically evaluate their own decisions. Many startups fail because the entrepreneurs did not possess the right skills. Hollywood and media do a great job in convincing us that a high school drop-out with big dreams and no skills can build a unicorn from their parents’ garage. Entrepreneurs do need skills-be it technical, managerial, financial, or ability to envision the future. Many startups are actually founded by technicians-say a programmer, or fashion designer. Possessing great technical skills enables an individual to perform well at a job, not in running a company. Thus,entrepreneurs need to have well-rounded knowledge, and where they lack skills, they should look for cofounders with expertise in the given area. 

When the going gets tough, many entrepreneurs also fizzle out. There is a school of thought which promotes the idea that many of the traits possessed by successful entrepreneurs are inborn-for instance, risk-taking ability, tolerating ambiguity,or creativity. While the process for making a great product or service can be taught, the same cannot be said about said about these characteristics. This is also a reason why entrepreneurs should identify cofounders to compensate for their weaknesses or shortcomings. Research conducted by MIT suggests businesses with multiple founders have greater probability of success. 

Team-related factors 

While multiple founders can increase start-ups’ chances of success, any disharmony between themselves and with investors can be catastrophic. This is where a founder often regrets not going it alone. However, being a one-man show is nota great thing either. The time will come when the entrepreneur will be depleted of all energy and motivation. Andin that instance, the product or service quality will start going south. Despite seeing the declivity, the listless entrepreneur stops caring; eventually customers stop coming and the business dies. 

Entrepreneurs should find cofounding soulmates with some similarities and some differences. Similarities in their vision, understanding, and differences in skill sets and expertise to complement one another. Having a great set of employees is also key. In Sri Lankan, entrepreneurs cannot run away from staff turnover issues, and this is usually worse for start-up companies. Thus, from the word go, emphasis should be on building a system or process. Employees will come and go; a system will enable the company to move forward irrespective of who goes. As Jim Collins states, great CEOs are more like clock builders than time-tellers. 

Author Gary Klein states that prior to starting a project, team members should carry out a pre-mortem; in other words,hypothetically assume that the project will fail, and identify the factors that will contribute to it. This is what entrepreneurs must do before launching theirstart-up.Founders are usually fearful of the “failure” word and reluctant to talk about anything negative. However doing so prepares a start-up from the onset. By being aware of common mistakes and planning contingencies, a start-up can improve its chance for success. 

(The writer is a researcher on entrepreneurship and small business development. He welcomes feedback, comments at [email protected].)