The hard truth about startups is that 8 out of the 10 businesses fail. However, entrepreneurial spirit is growing worldwide. So how can you be among the 20% of the companies that succeed? We have to first figure out what went wrong and how to avoid making the same mistakes like most startups did.
Here are the top 5 reasons why startups fail, according to CB Insights, based on an analysis of 101 startup post-mortems.
5. Pricing/Cost Issues (18%)
Pricing can be a very tricky aspect for some businesses. On one hand, pricing can mean the positioning of a product or service. There is also the stereotype of ‘higher price, better quality’. It would be beneficial to know which market you are catering to, which income level they are in and how your competitors’ pricing strategies. Understanding your value proposition would also be crucial to set a number on your product line.
On the other hand, entrepreneurs must find a balance between their costs and their profits. It happens that the price of the operating is business it too high in comparison to the revenue it is producing. Of course, you would not want to continue to operate at a loss. This may be the time to think about ceasing operations or finding a much more cost-effective method of doing business.
4. Get Outcompeted (19%)
“I don’t have any competitors.”
This is exactly how you will be outcompeted. If one person thought of a business idea, it is most likely that someone else did too. It is good to learn about your competitors and learn about what they do to improve your value proposition and enhance your differentiation. In this case, ignorance is not a bliss. It is better to know who you are dealing with than to be blindsided by them.
Take Skype and Zoom for example. Skype was the pioneer video communications platform that existed almost two decades ago. However, with the catalyst of COVID-19 pandemic, Zoom quickly took the crown from Skype, sky-rocketed in market value, and became the leading platform. How did this happen?
3. Not the Right Team (23%)
Diversity in a team has been highly recommended for many reasons. A team with different skills sets, background and knowledge would complement one another, which will result in better decision making.
Sometimes entrepreneurs would manage the entirety of the business by themselves because they would not like to ‘waste’ their money to hire a CTO, for example. Or, they simply felt like they could do the process on their own. No one is a jack-of-all trades – we have our own strengths and also weaknesses. Having an expert on board with the skill sets and personality to balance with yours will allow you to focus on what you do best and save precious time. Also, it will most likely yield a better result in the future.
2. Ran Out of Cash (29%)
Financial planning important to run a business, which unfortunately has been underestimated by many entrepreneurs. These include questions such as how much initial investment is needed, how one should spend the money and when to raise additional funding. When not carefully planned, these will cause the downfall of a business.
For international companies, there are more factors to consider; conversion rates and cost of living abroad are some of the examples. For those who are aiming for the Startup Visa, they will have to prove to the government if they have enough resource to sustain themselves and their business in Canada. One way to avoid running out of money is to find out what incentives are available for your business. Angel investment is not the only source of funding; there are also loans and grants available to support startups as well.
1. No Market Need (42%)
It is no surprise that this is the first on the list. The questions is: Are you solving their pain point in a scalable way?
Market validation is essential when launching your business. Even though you have a good solution or product that is selling in a market, does not mean that there is a need for it in other markets. This is why extensive market research is important, especially when expanding abroad. Assumptions without actual data will not benefit you in any way for market entry. Sometimes a market is just not interested in the business model you are offering. Therefore, performing a thorough market research will be crucial to get the numbers and understanding of the targeted market and the industry, in order to see if your business has a fit or what pivot you might need to do.
LatAm Startups has seen and rejected cases where startups intending to set up their companies in Canada are fuelled mainly by personal reasons, instead of having business expansion as their priority. This motivation brings up tendencies for bias, in which led to using assumptions and faking market need.
Source: CB Insights
LatAm Startups is a non-profit organization that helps international startups grow their business from Toronto. We provide connections with key players such as government officials, angel investors, universities and other incubators and accelerators. A designated organization for the Startup Visa Program, we have programs with mentors that are experts in different aspects of the Canadian / North American market to help your business succeed.
Written by Gabriela Latief