Many startups fail; to be exact, 90% of all startups disappear from the market within the first five years. Often it is due to one and the same reason that young companies cannot establish themselves on the market. Of course, there is no guarantee that your startup will be among the successful ten percent that still exist after five years; but here we will show you the five most common reasons for the failure of startups and how to avoid these.
The article is based on an Investigation by CB Insights, in which failed startups were questioned and the reasons for the bankruptcies were identified and categorized.
This graphic gives you a first overview of why startups commonly dissappear from the market’s surface after a while. Afterwards we go into the deeper analysis of the reasons why startups fail and the existing solutions or preventive actions to consider for your own startup.
Reason 5 - The price does not cover the costs
Problem: The price does not cover the costs
Consequence: No profit
Solution: Thorough calculations before the foundation and Pre-Selling
A reason given by 18% of all failed startups surveyed is that the relationship between sales price and costs has not made a worthwhile business model possible.
This problem has to be solved before the foundation! Before building an MVP or even spending one Euro for your business, you should know what costs you will have to face and what customers would be willing to pay for the product.
These values cannot be determined with absolute accuracy, but good cost calculation and targeted market research, or even better Pre-Selling, will give you a pretty sharp picture of the ratio of possible pricing and necessary costs. If the ratio is not right, then the business model must at least be reconsidered or even discarded.
Reason 4 - The competition is too strong
Problem: Competitors have already taken over the market or are doing so through a better business model
Consequence: Demand collapses
Solution: Exact analysis of the competition before and during the foundation and at best high financing. If the product already exists, seriously ask yourself if it makes sense for you to enter the market!
It is a painful failure when the competition finally brings you to your knees. This reason can also be counteracted even before the company is founded: A good analysis of the competition provides information about whether there is still an unmet demand or whether someone else is already doing what you would like to do with your startup.
Take a close look at who is offering competing products for your product, how much they cost and which customer group they should address. Is there still room for your product on the market? Sooner or later, 19% of the startups in the study did not (or no longer) have room for your product.
Every new start-up should serve a new niche and bring something to market that had never been seen before. Often this does not have to be very different from already existing competing products. Even specialization in a certain target group or a market that has not yet been developed can help products to succeed.
One thing should not remain unmentioned: Small companies with less to moderately strong financing and a good product always run the risk that someone with a very strong financial back-up might launch a runner-up on the market and simply force a not yet fully established product from the market with a lot of marketing expenditure. Unfortunately, there is not much that can be done without the corresponding patent rights in some cases.
Reason 3 - The wrong team
Problem: The team cannot or does not want to work as it should
Consequence: No efficient processes or dissolution of the team
Solution: Only bring really suitable partners into the company and give them the right incentives
The top 3 are not opened with product defects or bad market environment - reason 3 is a purely personal problem, which 23% of startups had to experience. If the team can’t work together effectively, doesn’t have the right combination of skills, or even comes to a complete standstill, the startup is finished. Because it is almost impossible to change a team spontaneously.
The following applies to all team members: the really suitable expertise and experience must be available and this must be well paid in return. Otherwise, you either have an insufficiently good team or a team that will not stick together in the long run. A combination of salary and company shares covers the running costs of the team and creates interest in the long-term success of the company.
In this article you will learn more about which technical partners can be brought into the company and what the respective advantages and disadvantages are.
Agencies such as VIPERdev minimize the risk of failure because they have an experienced development team and can implement your digital product or MVP for a fixed price. For a long-term cooperation, tech partners such as Next Day Ventures are also suitable; with them you expand your team with an internal CTO, who is equipped with an experienced development team and is long-term incentivized by company shares.
Reason 2 - No more liquidity
Problem: Not enough available financial resources
Solution: Reduce running costs and appropriate or more financing or financing through own sales
The second most common cause of death was experienced by 29% of startups: They no longer had sufficient funding to continue.
To prevent this from happening, you should think about the various financing options for your startup early on.
However, the central adjusting screw here is hardly the investment in the startup itself: Rather, it is the costs that are the reason why many start-ups do not get by with cash injections for long. Keep your running costs as low as possible at the beginning and at the same time position yourself on the market as quickly as possible. If you are able to bootstrap thanks to Pre-Selling, you will also need less investment and you will be able to get by with them for longer.
Too many startups make the mistake of hiring employees early, increasing the running costs and then dying in the end. To avoid this, VIPERdev is a suitable alternative, because thanks to a fixed price, we do not incur any running costs and can bring your product to market within a few weeks to generate initial revenues.
Reason 1 - No market need
Problem: Not enough demand
Consequence: Insufficient turnover
Solution: Exact analysis of the demand before the actual product development; ideally through Pre-Selling
An alarming 42% of failed startups cited as a reason that there was not enough demand. So four out of ten startups that go bankrupt simply do not have enough paying customers. Anyone who realizes this after product development has sunk a lot of money and certainly not a startup anymore.
Again Pre-Selling is an excellent tool: If customers are already so convinced of the idea that they want to pay money for it, you can be quite sure that there is a demand and you can hope for income in the future. In any case, the potential clientele must be properly analyzed before the company is founded.
The truth is: Nobody was or is waiting for your product. It always takes persuasion and persistence to sell your product. To be aware of this is already an important first step to avoid the most common reasons for failure.
We at VIPERdev know the hurdles and even have already failed with our own startups. Today we use our experience not only for our own career, but also want to share it with our customers. Whether as an agency, or in a more in-depth form through our Tech-Partner Next Day Ventures: We know how to go on.
If you have any questions about the different reasons or you want to know more about how we can help you to avoid them in your case, please contact us. Either use the contact form on our website or book a free consultation appointment with this link.