Why So Many Startups Fail?

Most of the startups that failed early on or had to shut down due to lack of funds are hardly spoken about. We generally get to read or hear about only the success stories of various startups and their founders. According to a study conducted by IBM Institute of Business Value, 91% of all startups fail within the first 5 years. This is an astonishing high number and there may be multiple reasons for failure of startups.

Building a successful startup requires perseverance, hardwork, patience and a lot of time and energy of the founders. Avoiding some of the common mistakes can improve the chances of a success of a startup. There are number of reasons for a startup to fail or be successful. We believe that these are the five key reasons why a startup might fail:

        1) Understanding the Market – It is very important that the founders understand the size of the market and the actual requirement of the target market. Once they are confident that the market is large enough to build a profitable business, only then they should launch the product in the market.

        2) Team – It is important that the startup identifies the right team to manage the day-to-day operations and all other areas of business. A founder can’t handle and scale the business independently. It is very important to identify a good team which can execute the vision and deliver the products quickly and at the right cost. Hiring right people with right complementary skills to deliver the business objective has to be done very purposefully.

      3) No Control on Expenses – Sometimes founders go overboard, typically in situations when the startup receives good quantum of funding or if the sales traction is significant. However, the founders need to be extra cautious and ensure that money is spent judiciously, while being controlled at the same time. It’s important to work out ways and means of reducing the costs.

       4) Swiftness in Making Changes in Business Plan – One of the key attributes of a successful founder is the acceptance that the plan is not working. The founders should accept this fact and make immediate changes to the plan to make it work. The founders need not be too rigid to make the plan work and instead work towards modifying the plans at the right time to make them workable.

       5) Insufficient Funds – Every startup needs money to sustain the business as they may be cash flow negative in the initial period. It is important that the founders plan the cash flows properly and are able to raise capital at the right time. Further, the founders need to work towards making the business self-sustainable at the earliest so that the dependency on external capital reduces at the earliest.

The above stated ones may not be the only reasons for failure of a startup, there may be other reasons as well. We have analyzed a large number of startups over the last 15 years of our existence and based on our interactions with many startup founders, analysis and research of many industries, we feel that the above five are the critical factors which lead to a failure of a startup.

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