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International investors’ attention began to shift from large and traditional companies to startups after the 2008 Financial Crisis, which started in America and quickly turned into a debt crisis that spread all over the world. After all, even a large company like Lehman Brothers went bankrupt. In that case, instead of taking risks by gathering investments in such large companies, it would be much more logical to reduce the risk by distributing them to many small companies that use technology as their basis. At this stage, the startup trend, which means new generation technological enterprises, started almost simultaneously all over the world. In this concept, we believe that it is necessary to go into details and talk about why startups fail as much as we talk about unicorns that reached a valuation of 1 billion dollars.
It is very obvious that when we think about startups, we immediately think of university students who got rich in a short time in Silicon Valley in America. Although we explained in our related article, in our startup establishment guide, that the subject is not that simple.
On the other hand, before moving on to the subject, it should be noted that artificial intelligence and OpenAI breakthroughs are also feeding this sector. In this context, technological apps have become more and more involved in our lives, especially with the productive artificial intelligence that has begun to guide people. As such, investment and money have begun to pour into this sector and applications. It seems that interest in this sector and applications will continue to increase in the short and medium term.
Basic Reasons for Startups Fail
In order to reiterate a well-known fact in the world; “According to research, 90 percent of startups fail at the end of the first five years.” In other words, let’s say you have an idea for a startup that no one has ever thought of and that meets a very important need. You modelled this idea with the right business model. Then, you developed a rational income model and moved the business forward.
Everything seems right so far. On the other hand, the reasons why most newly established startups fail start from here. For example, if you cannot form the right team, if you cannot manage finance and legal processes well, your risk of failure goes, will increase. If you have not experienced these processes yet, we recommend that you take an interest in the details and examples we will give below.
Here is a list of answers to the question of why startups fail:
- Your service or product-market fit?: It could be said that your idea does not actually meet a need. The market does not actually need this product or service, but you think it does.
- Insufficient or weak capital: You must set up the budget correctly.
- Inability to establish the right team
- Inadequate business model
- Starting a business at the wrong time
- Excessive growth without planning
- Mistakes in marketing strategies
- Inability to manage customer and investor relations
- Underestimating competitors
Startups Fail at Idea Stage?
The idea you find may seem really innovative to you. In this context, it should be noted that entrepreneurs are generally in love with business ideas. Please do not make this mistake and do not fall in love with your idea. When you realize that the idea is wrong, do not hesitate to pivot, that is, change it and try again. In other words, it is a fact that no matter how good a software you make or how good a product you develop, if there is no need for that product or software, it will not catch on.
For example, would you pay for a product you do not need and buy it? This is what we call product-market or service fit. Let’s say you have determined your target audience and developed the software, but your target audience does not need this software. In this case, you need to know when to give up. For example, if you are in a traditional society and the rate of women working in that society is very low, an ironing marketplace application that brings together those who want to provide and receive ironing services will probably not catch on.
In other words, in such a society where women prefer to iron at home and do not participate in the workforce, developing an ironing application will probably not attract the attention of housewives. You can understand this after developing a small MVP application and testing it with your target audience for a while. During this period, when users do not show interest in your application, you should see the fault not in the users but in your own product and know to give up or change it.
Finance is Crucial!
On the other hand, capital and budget are also one of the most difficult issues for start-ups in the establishment phase. It is natural for new graduates, most of whom are software developers and young people, to have a lack of financial literacy. In such cases, using a portion of their budget for financial advisors or financial consultancy will be very positive in the medium term.
Another important issue here is that capital should not be spent on luxurious offices or vehicles. In other words, reaching the minimum viable product (MVP) by spending only in very necessary situations should be the first goal. Research shows that many new generation technological initiatives fail due to capital and budgeting errors.
Founders and The Team
We should mention that one of the most frequently heard answers to question of why startups fail is that they have a single founder. According to research conducted on this subject, which is very popular, the ideal number of Co-Founders is between 2 and 4. At this point, it should be noted that when the number of founders exceeds four, problems arise again. As we always say, it will be very useful for at least one of the partners to be a software engineer or to be advanced in coding. Along with the founder issue, the number and quality of team members are also very important. In this context, it is very important to find teammates who are familiar with the startup culture. At this stage, you will need to look for types that are flexible working hours and suitable for this culture.
Additionally, investor and customer relations should also be addressed under this heading. When necessary, it will be critical to make short presentations to investors, also called “pitching”, correctly. At this point, instead of selling dreams, it will be useful to present real figures based on data to investors and clearly state what they can earn in the future.
On the other hand, managing customer relations correctly is also very vital at this point. Let’s not forget that people do internet research and read comments before making even the smallest decision to buy a product or service. In this sense, bad customer relationship management can cause you to be a bad example of why startups fail. Newly established enterprises usually make the mistake of skipping this issue and do not give it the necessary importance. It should be noted at this point that perhaps the most important point today is customer relationship management with social media.
Marketing Matters!
Experience has shown that many successful products or services fail because they cannot meet the right customers and market despite establishing the right income and business models. In other words, no matter how good an idea you come up with and how right a business model you establish, if you cannot reach the target audience through the right marketing channel, your chances of success are low. At this point, it should be noted that entrepreneurs do not value and allocate budget for marketing, also known as marketing, as much as they value the idea and application and products. This situation is one of the most important answers of why startups fail in the short and medium term.
Be yourself, give importance to both traditional marketing channels and social media marketing and allocate budget in a way that will ensure that your product or service meets the right target audience. With a short research on the internet on this subject, it is possible for you to reach both professional organizations that provide services and to reach people who provide this service amateurishly as mentors.
