Why startups are failing?
Startups are prone to failure by definition. And 90% of them fail in different stages of their life cycle. I have elaborated on this issue in my previous blog, i.e., Why do startups in India and the US fail? This blog cited why startup failures are common, the root cause of their failure; the various challenges startups face, etc. This blog, which is a continuation of the previous blog, will analyze why startups fail during different stages of their operations and what dilemmas they face.
First let us understand the startup types based on their maturity or survival years. Startups can usually be categorized into three different categories based on their life cycle. The three categories are:
First let us understand the startup types based on their maturity or survival years. Startups can usually be categorized into three different categories based on their life cycle. The three categories are:
- Early-stage startups(0-1 year old): Early-stage startups are in the development stage and are focused on product development and building a solid customer base. These startups are loss-making in the initial years but look to generate strong cash flows in the future.
- Growth-stage startups(1-5 years old): When a startup has reached a consistent customer base and a steady source of income, it is known as a growth-stage startup. These startups have a strong market demand. This means that new customers, recurring customers, and billing will increase. Profitability is critical in this stage.
- Mature-stage startups(5+ years old): When a startup generates revenues year after year and has a very well-established Product-market fit is said to be a mature startup. These startups generally go for Series B & C funding.
These startups may be into different categories and may be catering to different sets of customers, however, the sole purpose of these startups is to generate revenue and provide customer satisfaction. As per my analysis, 80-90% startups fail within the first 5 years of inception due to some challenges which act as a hurdle in their revenue generation and in delivering customer satisfaction. Lets deep dive into some of these challenges faced by startups in each of the above stated stages.
Challenges faced by early-stage startups
As mentioned previously, the main focus of early stage startups is to develop products based on the feedback from the market and create a customer base. During their course of journey, these startups face a couple of major problems. One is in finding out investors and the second is ensuring product-market fit. Lets deep dive into these challenges in detail.
Finding investors is a big problem for early-stage startups
Funding essentially means money provided, especially by an organization or government, for a particular purpose. Startups often look for investors to help them with funding and strategic decisions. There are various stages of funding for early stages startups, listed below:
- Pre-seed Funding
- Seed Funding
- Angel Funding
1. Pre-seed Funding
Pre-seed funding is the earliest investment round in which a Start-up raises money to validate its problem-solution hypotheses, propositions, and demands. Pre-seed capital is needed to set the bottom for the enterprise operations to begin and ensure that the founders’ commercial enterprise is a feasible one.
Challenge:
One of the most challenging aspects of raising funds through pre-seed investment is persuading investors to invest in your company. The owner must represent the firm’s potential correctly when it’s still in the concept stage. The game is entirely based on one’s confidence because the firm has naive financial figures to prove the startup’s potential.
2. Seed Funding
Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises.
Challenge:
Raising an investment may seem lucrative for the founder in seed funding, but it is a high risk for the investor. That’s why investors hesitate to put their capital in the startups which have not grown enough.
3. Angel Funding
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.
Challenge:
Angel investors are risk-takers, but they also set a high benchmark for their investment. Also, angel investors put a lot of restrictions on the startup founders after they become a part of their management.
Ensuring Product- Market Fit
When a startup identifies the target customer and serves them with the right product, it is said to achieve a product-market fit.
It is measured through surveys determined by the percentage of users who think your product is a must-have. Early-stage startups require cash, and on top of that, they build new products and features to attract more customers. Eventually, startups lose money in that process. You should create a relationship with your customers and scale up your product. Startups need to identify their customers’ pain points and provide unique solutions.
Challenges faced by growth stage startups
The main focus of growth stage startups is to increase revenue and profits. During their course of journey, these startups face a couple of major problems which are as below:
- Finding the right product-market fit
- Poor marketing strategy and application
Finding the right product-market fit
Finding the right product-market fit is like finishing an unfinished and unsolved puzzle. Even growth stage startups often fail to harmonize with it. Many growing startups fail because they invest in things that no one wants. These are some of the signs which indicate that you haven’t found the right product-market fit –:
i) If your customers aren’t willing to pay a premium.
ii) They don’t give constructive feedback for your product
iii) You cannot gain new customers
iv) Customer acquisition costs surge with time.
Growth stage Startups should put product-market fit ahead of all other goals because those who achieve it have a much better chance of succeeding and raising funds.
Poor marketing strategy and application
Astonishingly, even growth-stage startups sometimes don’t put adequate effort into marketing their product and services, leading to their failure. Marketing has been a significant problem in the success of a startup. Most startups come up with the idea that it is something new but often don’t get traction in the market because of poor marketing, eventually resulting in poor brand visibility. Founders of startups think that customers will find them because of their uniqueness. And also, many founders, because of cost-cutting, spend less on marketing.
Challenges faced by Mature Startups
A mature startup is one that has passed both the emerging and growth phases. Startups in this category tend to be larger, older, and more stable. The main focus for startups in this category is to achieve economies of scale and reduce operating expenses. These startups too face problem in achieving right funding from the investors, largely due to following challenges:
- Gradual investment decline
- Poor marketing
Gradual decline in investments in a mature startup
Mature startups cannot raise funds because they have already raised a lot of money. So investors want the accountability of those funds, which results in a scarcity of funds. Startup founders also don’t partner with investors for the long run, thinking that the funds they have raised would suffice. They need to maintain a long-term relationship with the investors who can fund successive investment rounds. This would help the CEOs save time and effort in onboarding new investors.
Failure due to poor marketing
Even startups having more than five years of experience in operations sometimes fail to do proper marketing. When your company is gaining the customers’ attention, the marketing decisions you need to make become even more complex. Utrip is one such example. It was a travel planning startup that used AI to create personalized itineraries. But due to poor marketing, it failed after seven years of its operations.
Key Highlight of challenges faced by startups of all categories
- At any stage of their life cycle, startups face two significant challenges, i.e., reaching out to investors and doing proper marketing. Sometimes they cannot approach investors due to low brand awareness, and sometimes investors seek accountability for their funds.
- In the case of marketing, startups often cannot find the right product-market fit. They spend on many new products and pay high customer acquisition costs, leading to their failure.
Survey Demographics
I have attended 10+ online and offline events, such as The Makers Summit, India’s biggest startup expo, Connecting ideas with money, Bangalore’s Big Business Tech, etc and have met hundreds of startups operating in more than six domains, including Fintech, blockchain, E-commerce, Agritech, Edtech, IoT, Retail, etc. (please refer to the picture below). I have surveyed the founders of those startups to identify their problems. Insights have been identified from the above study and are mentioned below which are similar to the ones stated above.
Survey Participants
Fig A: Sectors of startups being surveyed
- Edtech startups and IoT startups were a majority chunk of startups that participated in the event and were surveyed.
- Some startups from the emerging technical domains like blockchain and agritech showcased their unique solution to the investors where we also explored the potential future.
Fig A: Sectors of startups being surveyed
- 60% of the startups I surveyed were growth stage startups while 40% of the startups I surveyed were growth stage startups.
Top Challenges faced by startups to make their brand successful
1) Early stage startups
When I asked Early stage startups about their top challenges to make their brand successful, the majority cited Finding investors and online marketing as solutions to the most significant challenges.
- Finding investors (67%)
- Market Research and Online Marketing (54%)
- Finding and participating in events (23%)
- Sales (20%)
- Operations & Delivery (15%)
- Scaling up (10%)
- Founders conflict(1%)
2) Growth stage startups
- Delivering high customer experience (70%)
- Market Research and Online Marketing (50%)
- Finding and participating in events (10%)
- Sales (30%)
- Operations & Delivery (35%)
- Scaling up (25%)
- Founders conflict(1%)
Conclusion
Most early, growth and mature startups take a lot of pain in finding investors (67%) and online marketing (54%). Startups face difficulties raising funds because of a lack of knowledge about various fundraising events. Also, many startup founders don’t have an excellent network to connect with angel investors. Startups should do an organic search to find out about various events. Also, they need to improve their content to become more visible in front of the investors and enhance their online marketing. Startup founders should use various platforms like LinkedIn and Twitter to connect with angel investors to reach out to them.
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