Why Do Start-ups Often Fail? - Blog Feed Letters

Why Do Start-ups Often Fail?

by Anshu Dev

Starting a new business is always exciting and can be extremely profitable if you make the right decisions. But every start-up is also like playing in an online casino: you often have to rely on your luck and make risky decisions. A study by CB Insights shows that over 90% of start-ups fail in the long term. In this research, in which more than 110 start-ups participated, the reasons for the failure of start-ups were also listed. Do you know what they are?

Running out of cash

Almost all start-ups get off to a good start, as the vast majority manage to collect large amounts of cash during the funding phase. However, the number of start-ups that use this cash correctly and complete the funding phase without any problems is very few. In 2019, an AR company called Daqri managed to raise $250 million in funding but went bankrupt before it could even produce a prototype because it had run out of all its money at the partnership stage. This is an issue that affects 38% of start-ups, and attempts to raise new capital often fail once the money runs out.

No market needs

Just because you have a good or even “cool” idea doesn’t mean there’s a market for it. 35% of start-ups go bankrupt because there is no market for their ideas. For example, have you ever heard of the name Quibi? It managed to raise $1.8 billion in funding and was planning to become a mobile-focused streaming service. Although this was a very “cool” idea, there was no need in the market. All existing streaming services were already running smoothly on mobile devices. Make sure that the idea or product you have in mind meets a need in the market.

Getting outcompeted

Sometimes, even though your idea has a place in the market, someone else may act quicker than you. This is the third big problem that affects 20% of start-ups: if you noticed a need in the market and started a project for it, remember that there are at least two other start-ups willing to do the same as you. The quicker wins, the slower fails – it’s that simple. For example, Mac & Mia was a delivery service for children, but before it could go into operation, another company called Stitch Fix succeeded in taking over the market with the same idea. Mac & Mia lost a lot of time trying to perfect their project.

Flawed business model

Although “business model” seems like a very generic word, it still expresses a very simple truth: if you cannot decide what your business model will be at the beginning, you will never be able to complete your project because you won’t be able to establish a specific focus. Before the funding stage, you should determine what you are aiming for and not change it; otherwise, you will never stop being a start-up. JAAK, a blockchain music start-up, failed to launch for 6 years and eventually went bankrupt because it couldn’t decide what it wanted to do.

Legal challenges

If the industry you want to enter with a new idea is likely to be affected by legal changes, you should be very careful: even a simple change in the law can cause you to go bankrupt. This is most true in the financial sector, but sometimes even in sectors such as transport. Bluesmart was a smart suitcase manufacturer: the suitcases it produced had large lithium-ion batteries and could also be used as a giant battery. It was a good idea but went bankrupt in 2018. This was because airlines started not accepting non-removable lithium-ion batteries in the luggage compartment. Bluesmart suitcases were essentially huge batteries: there was no way they could circumvent this ban. Legal challenges cause 18% of start-ups to fail.

Pricing issues

You can have the best business idea in the world, but if you can’t set the right price for it, you will fail. The fact that you are selling a very luxurious product may require a high price, but have you ever thought about long-term viability? Are you sure that you can always sell your product at a high price? Maybe your price is lower than necessary? Hey Tiger was a start-up that sold premium cocoa products and was priced unbelievably high. Their products were much better quality than their competitors, but they could not find anyone who could afford to buy them. 

You may not have the right team

Most start-ups think they’ve put together the perfect team before the funding phase. The question is how suitable they are for the project: are you sure you are working with people who are experienced in the field in which the start-up will operate? For example, Katerra was a start-up that managed to raise $1.5 billion in funding and its future was thought to be very bright. But it went bankrupt in just a few years because, despite operating in the construction industry, it had designated a tech expert as its leader. This person was a tech wizard and was well-known for how talented he was, but having no experience with construction, he was unable to analyze problems and make the right decisions.

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