After researching all the reasons why startups fail, I’ve compiled the ultimate ‘don’t’ list for startups. Only one in ten startups make it big and becomes really profitable.
The startups that fail often do so after making avoidable mistakes. Make sure your startup succeeds by not doing the following.
1. Don’t skip market research
Many startups begin because someone has a good idea and runs with it, but a good idea just isn’t enough. Conducting thorough market research means making sure there is a real need for your product, there is a good product/market fit and that your plan has longevity and customers won’t lose interest once the novelty’s worn off. Market research also involves making sure you are clearly defined from the competition.
2. Don’t go for a niche (unless you’re really sure it’ll work)
Investors would rather back a product which is likely to have a large customer base rather than one that only appeals to a narrow market. What’s more, according to start up consultant George Deeb “investors tend to prefer businesses in sizable industries that are easily scalable, translated as more technology-driven than human-powered, where they can drive higher margins over time.”
3. Don’t invest all venture capital in the very first stages and neglect the product launch
Many startups fixate on the product development and neglect one of the most crucial parts- developing a water-tight strategy with which to present it to the target market. You need to budget properly so you not only have enough money to build a great product, but you can also effectively and iteratively test it along with your marketing strategies. This allows you and investors to see whether you’ll have a healthy and steady growth post-launch.
4. Don’t underestimate the importance of good management
Just because you have a great product and enough revenue, it doesn’t mean you’re automatically set to succeed. A huge amount of startups fail because of poor leadership, a weak team or overconfident senior management. Good management means a team that works well together, is focused on the project and motivated.
Startsup differ from traditional businesses in their spirit of high energy, risk-taking, innovation and belief in the idea, if your team lacks these qualities you won’t be able to weather the inevitable bad times. Startups also define themselves by having less of a hierarchy which works in their favour as everyone gets to have a say.
It’s worth fostering this dynamic as it’s the people working on a certain element of the project that will know that part best, so it’s beneficial for the startup if they can influence your management.
5. Don’t be blinkered
Many startsup fail because they can’t see when their product has shown signs it won’t be profitable and pivoted in another direction. What we can learn from lean startup methods is that no-one can see into the future to predict whether something will work, but they can adapt when it doesn’t and that is the actually the key to most successful startups.
Learn from mistakes, don’t give up, simply adjust and take a different direction, even if this means a u-turn. It is essential you are prepared to do this in the early stages while you still have enough capital to trial it.
6. Don’t think you know it all
This leads on from the former point, as if you are too narrow-minded, assuming you’ve got it all figured out already, you won’t be able to see when you need to seek advice.
There is a wealth of support and wisdom out there. Intuition is one thing but the most successful business people realise they can’t do it all on their own.
7. Don’t go with the flow
You need a good business model and plan to achieve return on investment which is again based on proper market research. You’re looking to get at least a 10x return on your invested capital and to be in with a shot of this, you have to work out a business model based on CAC / LTV. CAC is the Cost of Acquiring a Customer and LTV is the Lifetime Value of a Customer, and CAC must be less than LTV.
According to entrepreneur David Skok, startsup fail when: “They assume that because they will build an interesting web site, product, or service, that customers will beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV).”
8. Don’t run out of capital (and know when to spend it)
Running out of cash simply because it wasn’t spent in the right way is another reason why startups can go bust. As I’ve mentioned, something always goes wrong and you will need much more capital than you think. It is much better to overestimate rather than underestimate.
Relate your budget to a time scale with different landmarks (often revenue-based) to work for along the way. Decide when you need to earn back CAC and work towards it. Knowing when to pump in cash takes skill, always see the bigger picture and wait until the product is ready in order to reduce risk.
Are you thinking of setting up a new business? Let us know in the comments section below.