Starting a new business can be an exciting endeavor, but
statistics show that many startups do not survive their initial years. The
IBM Institute for Business Value recently conducted a survey in
collaboration with Oxford Economics. As per the study, as many as 90% of
startups fail within the first five years. A key revelation was that the
lack of pioneering innovation is the major reason for the failure of an Indian
startup.
According to surveys by CB
Insights, Startup
Genome, Inc42 and KPMG
International, recurring reasons such as lack of market need, cash flow
issues and team challenges frequently emerge. The average findings across these
sources indicate that:
- Market
Fit Issues: 42% of startups fail due to lack of
market need.
- Financial
Mismanagement: 29% struggle with cash flow or funding
issues.
- Team
and Execution Problems: 23% cite inadequate teams or
execution.
- Competitive
Pressure: 19% fail due to unexpected competition.
Here, we explore the top 10 reasons startups fail and how
early-stage investors can play a pivotal role in steering them towards success
while being proactive to mitigate risks.
Reason 1: Lack of Market Need
One of the top reasons startups fail is the lack of real
market demand for their products. CB Insights reports that around 42% of
startups struggle due to a misalignment with market needs.
For instance, India’s online food delivery platform TinyOwl
shut down despite substantial initial funding. While the concept was
innovative, it struggled to find a unique position in a market dominated by
established players with stronger customer bases.
Investor Precautions:
Early-stage investors should conduct thorough market research to assess whether
there is a sustainable demand for a startup’s product. Evaluating the USP of
the product plays an important role.
By examining consumer trends through surveys and evaluating
competing solutions, investors can avoid ventures that lack market demand.
Asking startups for their pre-launch surveys or user feedback can be a good
checkpoint.
Post-Investment Support:
If demand issues emerge post-investment, investors can assist by suggesting
pivots or helping to refine the target market. Drawing on industry contacts or
resources to realign product-market fit can help the startup find a viable
customer base.
Reason 2: Cash Flow and Funding Challenges
Cash flow issues remain a significant hurdle, especially
for startups in high-burn sectors like fintech, health tech and SaaS. According
to CB Insights, 29% of startups fail because they run out of money.
For example, the ed-tech platform Lido Learning in India
shut down due to financial struggles despite attracting investments early on.
The inability to sustain operational costs and secure follow-up funding
ultimately led to closure.
Investor Precautions:
Investors should scrutinise financial projections and cash flow models before
investing. It’s essential to gauge if the startup has a realistic financial
runway and a well-thought-out plan for securing further funding rounds.
Investors should also seek transparent communication about financial health.
Post-Investment Support:
In cases where cash flow becomes problematic, investors can provide guidance in
budget planning and fundraising. Assisting with introductions to potential
funding sources or financial advisors can stabilise cash flow management and
support sustainable growth.
Reason 3: Poor Team Composition and Leadership
A skilled and cohesive team is crucial for any startup’s
success. Almost 25% of startups fail because they don’t have the right team.
Indian fintech startup FT Cash, for instance, struggled due to leadership
conflicts and eventually shut down despite having a promising product.
Investor Precautions:
Investors should examine the founders’ backgrounds, the leadership team and
team dynamics during the due diligence process. Analysing the team’s
experience, previous project involvement and their commitment level, and
employee attrition rate offers insights into the startup’s potential
resilience.
Post-Investment Support:
If team issues arise post-investment, investors can help by recommending
leadership training or, in some cases, suggesting team restructuring.
Facilitating access to mentors or advisors with specific expertise can also
strengthen the startup’s operational leadership.
Reason 4: High Competition
High competition can create immense pressure on startups,
often leading to failure if they cannot differentiate themselves. A case in
point is Zomato-backed Indian food startup Runnr, which faced stiff competition
from giants like Swiggy and UberEats and struggled to capture market share.
Investor Precautions:
Before investing, investors should assess the competitive landscape and how the
startup differentiates itself. Identifying unique value propositions and
gauging the startup’s adaptability to industry shifts can mitigate competitive
risks. Does the product have upgrading and/or diversification capabilities?
Post-Investment Support:
If competition intensifies post-investment, investors can advise startups on
strategies such as niche marketing or collaboration with industry partners to
sustain their position. Supporting product innovation or suggesting geographic
expansion can also help counter competitive challenges.
Reason 5: Misaligned Business Model
A business model that doesn’t align with the company’s
growth strategy often leads to failure. HealthifyMe, an Indian wellness app,
faced initial setbacks due to a subscription model that didn’t resonate well
with users. It was only after pivoting to a freemium model that it saw a rise
in user engagement.
Investor Precautions:
Investors need to evaluate whether a startup’s business model aligns with its
market and revenue goals. It’s critical to review if the model can evolve with
scaling and is adaptable to different revenue streams.
Post-Investment Support:
If a startup’s business model proves to be unsustainable, investors can suggest
pivots or explore alternate revenue sources. Strategic inputs on customer
acquisition strategies and pricing models can greatly impact the startup’s
revenue generation potential.
Reason 6: Pricing Issues
Setting the wrong price point can either alienate customers
or lead to unsustainable margins. Indian fashion startup YepMe struggled with
this issue, pricing too low to attract sufficient margins for scalability.
Investor Precautions:
Investors should examine the pricing strategy to ensure it
aligns with both customer expectations and cost structure. High customer
acquisition costs paired with low pricing may signal unsustainable growth.
Post-Investment Support:
Investors can provide insights on market pricing trends or suggest
adjustments, such as offering premium tiers. They can also recommend pricing
tools to optimise value perception while maintaining profitability.
Reason 7: Lack of Competitive Edge
Operating in a crowded market without a unique advantage
can lead to failure. Indian e-commerce venture LocalBanya struggled to
distinguish itself from giants like BigBasket, leading to its eventual closure.
Investor Precautions:
Investors
need to ensure the startup has a distinct value proposition or technological
advantage. If founders can’t clearly articulate how they differ from
competitors, this could indicate vulnerability to market pressures.
Post-Investment Support:
Investors can advise on creating a competitive edge through differentiation
strategies, possibly by adding exclusive features or leveraging partnerships to
enhance value. Facilitating access to market analysis can also guide
competitive positioning.
Reason 8: Ineffective Marketing Strategy
A poor marketing strategy can prevent a startup from
gaining visibility and traction. For example, Dazo, a food delivery startup,
couldn’t scale due to limited marketing reach and failed to compete with larger
players.
Investor Precautions:
Investors
should scrutinise the startup’s go-to-market strategy, checking if there is
clarity on target demographics, marketing channels and customer acquisition
costs. Weak or unfocused marketing plans are red flags.
Post-Investment Support:
Investors can introduce marketing experts or firms specialising in scaling
strategies. Additionally, they can help the startup refine its brand message or
optimise digital campaigns, ensuring efficient allocation of marketing
resources to maximise impact.
Reason 9: Inefficient Operations
Poor operational management can hinder growth. PepperTap, a
hyperlocal grocery startup, faced issues due to logistical inefficiencies,
leading to its shutdown despite strong early growth. This can also be an issue
with service provider startups based on their supply.
Investor Precautions:
High
operational costs or lack of process automation can indicate inefficiencies.
Investors should evaluate the scalability of the operations model and check if
the startup has systems in place for monitoring efficiency.
Post-Investment Support:
Investors can suggest technology solutions or introduce experienced
advisors to help streamline operations, improve margins and operational
flexibility.
Reason 10: Regulatory Challenges
Unexpected regulatory changes can disrupt operations.
Fintech startup Zebpay, a cryptocurrency platform, had to shift its operations
overseas when Indian regulations tightened.
Investor Precautions:
Investors
should review whether the startup is prepared to comply with current
regulations. Investing in sectors with unclear or shifting regulatory
frameworks is a potential drawback.
How Investors Can Help
Investors
can connect startups with legal experts to navigate regulatory landscapes or
diversify markets to reduce dependency on restrictive regions, ensuring
resilience to regulatory shifts. Again, adaptability in the initial model plays
an important role.
Understanding the primary reasons for startup failures
equips investors with the knowledge needed to make more informed decisions. By
recognizing these pitfalls and adopting a hands-on approach in areas such as
market validation, cash flow management and team support, early-stage investors
can play a vital role in increasing the survival rate of startups in the
dynamic Indian market. Investors can take help of facilitator platforms like
Creddinv that deal exclusively with startup investments to be reassured of the
risks they are taking for high return potentials.
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