Why Start-ups Fail?

It is somewhat discouraging to know that about 50% of new start-ups fail. If you take time to listen to the reasons behind these failures, you will realize that every founder has a different reason. However, by digging deeper into the reasons given, all stories fall under specific categories. But what really causes this failure?

I came across this info-graphic shared by Vidit Chopra founder of ObserverzParadise.com. It was compiled by Startup Genome Project after analyzing a total of 3200 companies. The infographic shares some rather interesting insights on why startups fail.

To better understand the analysis, it is critical that you first understand the five core dimensions of business growth; customers, product, team, business model and funding. A successful startup must be able to scale properly through these dimensions. With that being said; the failure of most new businesses results from premature scaling of one or more of these dimensions.

Businesses that scale prematurely are classified as being inconsistent while those that scale properly are consistent. It is also crucial to understand the four stages of business growth:

Discovery: confirming if your business is solving a meaningful problem.
Validation: know if consumers are really interested in the product.
Efficiency: refine your business model and improve efficiency of customer acquisition.
Scale: scale resources accordingly to drive growth aggressively.

With that out of the way, here are the five key reasons why startups fail.

1. In a hurry to make money hence little research

Business growth stages are dependent on each other. If there is a mistake in one stage, there will be a ripple effect sweeping through all other stages. According to the Startup Genome’s study, inconsistent businesses raise 3 times more money in the efficiency stage and 18 times less in the scale stage. When there is no money for aggressive growth, the business stagnates.

2. Excessive expenditure

45% of inconsistent startups spend over $15,000 a month on customer acquisition whereas 80% of consistent startups spend less than $15,000. This often leads to financial strains which eventually strangle the inconsistent businesses.

3. Poor product development; unnecessary outsourcing

Inconsistent businesses have been found to outsource 11% of their product development in discovery stage and 19% in the validation stage. This leads to poor product quality which pushes customers away. The consistent businesses, on the other hand, only outsource 2 – 4% of product development. They have more control over the quality of their products.

4. Poor allocation of resources

About 77% of inconsistent startups focus 50% more resources in discovery stage on product development. This leaves a gaping hole in the other three stages. Consistent companies focus 45% of their energy in customer development. The inconsistent businesses also have 50% larger teams before scaling and 50% smaller teams after scaling.

5. Less focus on the scale stage

The scale stage is what ensures business sustainability and aggressive growth. However, the startups that fail give this stage less attention. They exhaust their resources in discovery, validation and efficiency stages. As a result, their business stagnates and gradually begins to collapse.

Balancing the core dimensions of business growth is the key to avoiding startup failure. Only the new business that is consistent in the startup lifecycle and scale end up succeeding.