Indian Startups had a stellar year in 2021, setting several new records -the number of startups acquiring unicorn status, the number of new startups launched, and the record funding received by startups. But amidst this success, it’s crucial to explore the flip side: why startups fail?
Now more than ever, Indian startup founders are aspiring the unicorn status, that is, a $1 billion valuation.
All the good news could make one forget the struggle it takes to launch a successful startup. It is no surprise that 90% of all startups fail within five years of being founded.
What should the founders do to mitigate failure?
Let us look at five factors that spell doom for startups and how the founders can address the situation fitfully.
Raising capital is one of the toughest hurdles for a Startup and small business to cross. With no access to capital, they have nowhere to go. With the probability of just 40% reaching profitability, funding options are scarce. A survey conducted by CB Insights shows that over a third of startups fail since they run out of cash and fail to raise new capital. Shortage of funds and lack of funding can severely shackle the startup / small business – stalling product development, curtailing the ability to retain staff or investing in marketing and other growth initiatives. The result is a downward spiral, negatively impacting the company’s viability and spelling doom.
The Answer: Startups need to focus on maximizing their runway – adopt effective revenue management models, concentrate on profitability – think of what is required to sustain without external funding, monitor fund disbursement – spend funds judiciously.
Founders need to invest time in creating a business model, after that, monitor progress against the defined milestones, such as creating a minimum viable product, launching a beta, shipping products to customers, as well as scaling the business model to attract new investors, and raising new capital through funding rounds. Engaging early on can a business coach can help startup founders create a viable business model and build in accountability of the founder, thereby helping avoid early mistakes and improving the odds of success over the long term.
Why startups fail is because many startups bring products to market that do not have a demand or do not offer tangible value to the customer. According to the survey from CB Insights, lack of product fit lies behind failure for 35% of all startups. It is especially true for founders who run with what they believe is the next big breakthrough without doing a market reckoner. A few that do find a market struggle to expand the base. As per the Mixpanel report, most software companies have a 20% retention rate, while those in media/finance have a 25% retention, and those across SaaS and e-commerce have an average retention rate of 35%.
The Answer: For a startup to be successful, it needs to have its product strategy in place. Undertake market research to understand the market demand and gaps before zeroing onto the product features and value proposition. Define your USP. Applying the lean product management ethos to your product strategy can significantly improve the success rate of a product launch.
Highly competitive marketplaces can create challenges for a startup to thrive if it lacks the necessary resources to expand. Nearly one in five startups cite competition as the biggest threat in going out of business. Competition from established companies with comparable products or services or new entrants that emulate a startup’s concept can pose a significant impediment to a startup’s success. Even in cases where the competition doesn’t kill a startup’s product, it will see its profit margins erode over the long term, forcing the company to go back to the drawing board, which in itself can be expensive.
The Answer: There are a few ways in which startups can effectively mitigate their competition, delay the saturation in the market and create a monopoly for their product. Define the product USP. Create a clear value proposition that stands out., which brings us back to having a sound product strategy. Do not rest on your laurels. Continuously evolve, add new features to existing products, and introduce fresh products that address changing consumer needs – building an ecosystem of products/services that work well together. An experienced business coach can help design the right product roadmap for your business.
Startup failure can result from a company’s inability to cover costs or generate sufficient revenue. Lower profit margins, increased competition, and reduced investment are some of the factors that can add to the problem. Lack of innovation in the space is the culprit if the survey conducted by VCs is to be believed. It states that 77% of Indian startups surveyed lacked innovation or a unique business model. This lack of innovation leads to lower pricing power, making it difficult for a startup to compete in the market or with more established players.
The Answer: Startups can navigate pricing and cost challenges through market research, cost-cutting measures, and funding options. Founders focus on innovation, bringing a unique value to the consumer. Consulting a business coach to determine the pricing can also be beneficial.
Product launch timing can be critical if it’s a new offering or one that addresses a seasonal demand. If a startup launches a product or service too early, customers may assume it is not ready for the market and will not buy. On the other hand, if a startup waits too long to launch, competitors may enter the market with similar products or services, occupying a niche and making it difficult for the startup to gain a foothold.
The Answer: To ensure a successful launch, startups should research and plan carefully. Having a business coach to help navigate the complexities of a major product launch can be the difference between success and failure. Understanding the needs and behaviours of potential customers can help the company tailor their launch strategies to maximize the chances for success. Additionally, it’s essential for startups to be flexible and prepared to adjust their launch plans as needed in response to market conditions and other factors.
Startups often fail, but those that do can build resilience for future challenges and increase their success rate. By learning from past mistakes, seeking support from others in the industry, and staying flexible and adaptable, startups can create a strong foundation for growth and long-term sustainability. Building resilience is not easy, but startups need to weather the storms of entrepreneurship and come out stronger on the other side.