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Studying the success stories of well-known entrepreneurs, one cannot derive one's own startup strategy. But studying the reasons why start-up companies, even those unknown to anyone, failed, you can avoid key mistakes and succeed. So why do startups close? Here are some interesting statistics.
Everyone has heard the success stories of startups like Google, Facebook, Amazon and many others. With the intention to succeed, novice entrepreneurs rely on well-known facts from the life of these companies, on “recipes for success”, modeling their future business. Is it surprising that they often burn out? No, because the “systematic error of the survivor” is triggered here, when people focus on the obvious positive aspects, overlooking the hidden, but much more important negative aspects.
According to statistics, in the US, 50% of small businesses close in the first four years. And in India, the average startup life is about 11.5 months - not even a year! Why it happens? Why are so many startups closing? For what specific reasons do people not succeed in their new endeavors? These questions were asked in the research firm CB Insights from New York.
American analysts at CB Insights systematically interview executives of closed startups by collecting startup “death stories”. An interesting collection of "posthumous" information, which is constantly updated, is recommended for reading to anyone who plans to open or has already opened a business. Based on the information gathered, analysts prepared a statistical compilation of the most common reasons why startups were closed. The statistics are constantly updated, but 20 key factors leading to failure are already clear and in the near future they are unlikely to leave the “podium” in the nomination “the most important reasons for closing startups”.
Naturally, the total percentage exceeds 100% - many of the leaders mentioned several reasons for closing startups at once. And if not all of the startups crashed faced with burnout, an unsuccessful attempt to rebuild the product, or legal problems, then almost half of the companies (42%) admitted that they closed due to the lack of market demand for the products they proposed. And almost a third of the companies the reason for the closure was the lack of money.
20th place. No pivot was made.
Tracing words from the English word pivot (“reorientation”, “change of strategy” 😉 modern startups call a change in the product, the business model of the company, or even the scope of the company as a whole. The reason why the pivot was needed could be an unsuccessful market research, poor team or an unsuitable product for the selected market, if you don’t realize the need for pivot and do not change quickly and radically ... well, 7% of startups closed for this reason.
19th place. Burnout.
An excessive enthusiasm for a project can also become a problem for startups, when without rest, in the absence of an appropriate balance between life and work, team leaders or the team as a whole comes to a number of problems - psychological problems or health problems. Against this background, interest in the project itself is lost.
18th place. No communications used.
“Networking” is another tracing-paper from English, which means establishing contacts with useful people and working effectively with them. As it turned out, about 8% of startups, having the appropriate connections and contacts, did not use them. There are many reasons for this: the feeling “I know better”, the fear that important information about the project will fall into the hands of competitors, the banal unwillingness to appear a layman in the eyes of friends and colleagues. And all these reasons can lead to a sad end. “Do not be afraid to involve colleagues, investors, experts in the work!” - recommend startups who have learned from their own bitter experience.
17th place. Legal issues.
Licensing issues, copyrights, and many other negative legal aspects are also among the main reasons for closing startups. Among the failed legal trials in litigation, analysts say, are many startups trying to work in the music market. Powerful law firms and legal departments of majors, many subtleties and features related to licensing music, caused the closure of a large number of young companies trying to work here. In Ukraine, one can also recall the experience of file hosting, music and video portals, which appeared and after some time disappeared, crushed by litigation.
16th place. There was no funding and / or investor interest.
In addition to the general reason “money ran out” (see below), 8% of startups separately noted the lack of interest in the company and the product from potential sources of financing.
15th place. Failed to expand business geography.
As analysts noted, for this one reason, essentially two were collected at once: the first - when a startup that successfully developed business in one region started work in a new place, but did not succeed due to the specific features of the new region; the second - when a remotely working team could not cope with issues of communication, management and planning.
14th place. There was not enough interest in the case.
Lack of interest in the chosen business or poor knowledge of the subject area can lead to the fact that the team will be busy working on a product that no one really needs. Analysts say: no matter how beautiful the idea is, its correct implementation is the key to success. And doing business, it’s worthwhile to study all its aspects with passion, dive into the topic, become interested and live it. Otherwise, you can fall into the ranks of those 9% of startups that, due to the lack of sincere interest in their work, could not keep the business afloat.
13th place. Pivot failed.
If the neglect of pivot as such led to the death of 7% of new businesses, then the unsuccessful pivot caused the closure of 10% of start-ups. Pivot for Pivot is a bad step in business. Changing a strategy or product should be a well-thought-out decision, calculated and planned.
12th place. The team / investors did not have unity.
For startups, the quarrels of the co-founders are very dangerous. However, according to analysts who investigated this issue, mutual understanding is important not only among team members, but also between the team and investors. Every eighth startup was closed precisely because of the lack of harmonious relations between team members among themselves or the team with investors.
11th place. Priorities were lost.
13% of startups cited personal problems, third-party projects that distracted them from the goal, as well as the fact that the startup itself was no longer a priority for the team as a reason for their closure.
10th place. The product came out at the wrong time.
The problem of timely release of the product, as it turned out, leads to failure for a startup in every eighth case. Whether the product was released too crude (too early) or whether the product was refined to perfect condition until other more attractive offers appeared on the market, all this leads to problems and is fraught with the closure of the business.
9th place. Ignored customer needs.
Any solution - a product or service - is designed to solve someone's problems. If you ignore the wishes of your potential client, then this is almost guaranteed to lead to a speedy failure. Studying the needs of consumers, feedback from potential and existing customers and prompt response to their needs - if this does not happen, then the startup will not see success.
8th place. Bad marketing.
Similar to the study of consumer needs, you need to understand how the market as a whole will accept a new product. Among the questions that investors primarily ask start-ups, there is the question "Who is your marketing?" If there is no marketer in the team and is not planned, then a startup is often not of interest to the investor. But even in teams that were engaged in marketing, but did it inefficiently, things are going badly: 14% of startups closed for this very reason.
7th place. Product without a business model.
The basis of any entrepreneurial activity is a business model - a system according to which a business, in fact, makes money. If the business model is not clear, if the founders of the business do not have an understanding of where the product comes from, how it enters the market, how it makes a profit and how the business can be scaled further, then the startup will have a sad fate.
6th place. Inconvenient to use product.
The cornerstone of any product is user experience. If a product or service is inconvenient to use, then this leads to the fact that even already attracted users refuse the product. Accordingly, there are no new clients with this approach. 17% of startups crashed precisely because their product was simply inconvenient to use.
5th place. Problems in pricing and cost.
Analysts say that for many startups, pricing is a “Chinese letter." A bright idea, understanding the needs of the client, successful marketing, understanding what the startup will earn from is wonderful. But at the same time, it is important to set a price high enough for the product so that the income from its sale covers expenses and makes a profit, and low enough that potential customers pay attention to it. In 18% of cases, startups were unable to find such a balance, which led to the closure of the business.
4th place. Defeat in competition.
Despite the saying that “a startup should not look back at competitors” (they say that this is a “new” business and the pressure of competitors is not such an important factor as competition in established markets), in 19% of cases, startups crashed precisely in the competitive fight. Do not say that you were not warned.
3rd place. Inappropriate team.
“What is your composition of the team?” - this is the first question investors ask start-ups after the pitch, when it is decided whether to give financing to a new business. A balanced team, where a specialist who is competent to solve it is allocated to solve each of the key tasks may not be the key to success - there are many other factors, as we see. But the absence of such a team is the reason for the defeat of startups in 23% of cases.
2nd place. Money ran out.
Analysts point out that two resources such as money and time should be very carefully distributed in each new business. The search for financing is a very important issue for those teams that do not want to finish, like 29% of startups that have ceased to exist due to financial problems.
1 place. There was no need in the market.
Surprisingly, many startup teams until the last moment are sure that the market is interested in their product, while in reality there is no such demand. Startups are often taken to solve the problem that they are interested in solving, instead of solving the urgent problem of their potential customers. In 42% of cases, startups are closed precisely because, even if they assembled a dream team, created an excellent product, solution, service, etc., but nobody needed their product or service.
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