Top reasons why startups fail

May 24, 2019 11:06
Entrepreneurs who try to build startups without meeting their potential customers and understanding the market needs usually end up paying a price. Photo: Reuters

A CB Insights research report recently discussed a number of startup failures, and compiled a list of top reasons why such ventures fail.

The No.1 reason for failure is misreading the market demand, as noted in 42 percent of the cases. Many startups make poor bets, assuming that if they just create a "cool" product or come up with solution to a problem, demand would automatically follow. 

Running out of money is the second big reason for failure, cited by 29 percent of startups. Starting a business means a lot of hidden expenditure items, from web hosting, utilities and office rent, to other unexpected costs. Startup entrepreneurs would do well not to underestimate the required budget to keep the operation going. 

A weak founding team is considered by 23 percent of startups as the third reason for failure. For any small business, it's critical to build the right team. The team members should honestly assess each member’s skillsets and personality. And they should always strive for the same goal.

Getting outcompeted was cited by 19 percent of the ventures, making it the No.4 reason for failure. Startups should never ignore competition; they should understand their competitors and should also have a clear idea as to their own competitive edge. Entrepreneurs should be careful not to be blinded by the excitement of founding a new venture.

Pricing/cost issue was the reason for startup failures in 18 percent of the cases. Companies need to make comparison and tests in pricing. You might think that price is not an issue as long as a product has real value in it. But that could prove a wrong assumption.  

User-unfriendly products made up another top reason, accounting for 17 percent of failures. Bad user experiences might overshadow good product ideas. Interaction with users is critical for smart products. Products that can help users save time are most popular at present, and from my observation in the market, I believe startups should not squander or test users’ patience with the new product.

Poor marketing is another key reason, cited by 14 percent of startups. Startups usually use all their money on product development, and don’t have sufficient capital for marketing. That could be a big issue. Finding out your target audience and converting them into customers is not an easy task; it can prove more challenging than building a good product.

Product mistiming is another top reason, making for 13 percent failures. If you release your product too early or too late, it might receive poor response from customers. I have seen many startups solely focus on developing a great product, without paying enough attention to the launch timing. That could prove costly, as customers may not be willing to wait. To ensure success, startups should focus on market feedback, and keep up with the market needs and trends.

This article appeared in the Hong Kong Economic Journal on May 21

Translation by Julie Zhu

[Chinese version 中文版]

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Venture Partner of Sequoia Capital China, former head of the data committee and vice president at Alibaba Group.