Sky Garden, MallforAfrica, Bkam, and Wabona Shut Down Their Businesses. Let’s Deep Dive Into The Reasons Why Startups Fail.
Great businesses begin with a great idea and this foundational principle has inspired millions of people to take that huge leap of faith and enter the startup bandwagon. But, sorry to burst the bubble, but a great idea is not the only key to a great business. There are dozens of startups that have been created out of good ideas, only to collapse under their weight, victimized by their competitors, or fail to scale up from the start owing to different reasons that range from improper market research, and cash crunch to competitor challenges.
According to the “The Better Africa“ report published by Weetracker in partnership with GreenTec Capital Africa Foundation, the shutdown rate for startups on the African continent between 2010-2018 were at 54.20%.
Further, the report showed that Ethiopia (75%), Rwanda (75%), and Ghana (73.91%) were among the countries that experienced the highest shutdown rates among startups while Nigeria – among prominent startups hubs in Africa – witnessed the maximum shutdowns at 61.05%, followed by Kenya at 58.73% and South Africa 54.39%.
However, the silver lining is that VC (Venture Capital) investors show a keen interest in the continent.
So, what makes a startup fail, and how as an entrepreneur you can prevent that? While there are many reasons and defining a reason is easy. So along with the top 6 reasons why startups fail, we’ll also try to decode the patterns that lead to such startup failures.
Market Does Not Need The Product/Service
The most common reason yet the most ignored reason by startups is understanding the market requirement. This startup failure reason is due to the reverse thinking process that most entrepreneurs follow while starting up.
Instead of – Identify the problem -> Finding the solution -> Building a product -> Monetizing it
Entrepreneurs choose to – Build a product -> identify a problem related to the product -> Align the solution -> Monetize it
The problem with this process is that the budding entrepreneur might build something that no one needs or worse, something that already is in the market.
For eg: Microsoft launched the Zune in 2006, and then the Zune HD in 2009. But discontinued the brand in 2011. Reason is the lack of market research. Zune was introduced as a direct competitor to Apple’s iPod and despite the aggressive marketing efforts by Microsoft, it had little success. The problem was Zune offered nothing new and Apple was already miles ahead of Zune in terms of technology. The lack of market killed Zune, and Microsoft failed to anticipate this due to a lack of market research. You can analyze and check if your product is needed in the market by doing in-depth market research and finding the product-market fit.
Cash Crunch
Doesn’t matter how many quotes you have read about “Money Is Not Everything”. To tell you the reality, it is the lifeline of any business, especially startups. It is the key resource that keeps the business up and running. The cash crunch is one of the most common reasons why startups fail.
A startup can run out of cash due to:
- Improper resource planning
- Failure to raise funds
- Lack of revenue
- Mismanagement of funds
One example is Sky Garden, an E-commerce startup that had an Amazon-like modus operandi that allowed third-party merchants to sell everything on the website from home goods to electronics. The startup shut down its operations in September 2022 after being around for just 5 years. Why? A cash crunch after failing to close their next round of funding.
To avoid a cash crunch for your startup, ensure:
- You have a handle on your finances and are spending wisely,
- You have a clear understanding of your unit’s economics
- You have a plan for how to raise further funds if needed
Threat from Competitors
It doesn’t matter if you brought the idea and have built your business on that because there will always be competitors who can become a threat to your business if you do not scale up and improvise your offerings with time. Competition can come from many places – a new entrant with a better product or service, an established player that enters your market, or even another startup that can execute the idea better than you.
Irrespective of the source, if you’re not prepared to deal with competition, it can quickly lead to your startup failure.
A classic and well-known example would be Nokia. Nokia was the first to create a cellular network in the world. In the late 1990s and early 2000s, Nokia was the global leader in mobile phones. Their failure to innovate and being overconfident about the brand led them to failure. Their assumption that being a well-known brand they would arrive late to the smartphone race and will still win brought the curtains down for them. In 2008, one year after the first iPhone release, Nokia finally decided to compete with Android, but it was too late. Their products weren’t competitive enough.
It’s a must for an entrepreneur to keep an eye on the competition and stay prepared to adjust their plans accordingly to avoid a similar fate.
A Competent & Skilled Team
A good team holds a strong foundation for a startup. This means before venturing into the startup workspace ensure you have a team with the skills and experience necessary to execute your business plan. If your team is not competent, it will be difficult to make your startup a success.
A perfect example of this is Enron, which was once named “America’s Most Innovative Company” by Fortune Magazine for six years in a row. The all-too-familiar story of greed and deception by its employees who forged documents of revenues resulted in over 20,000 of Enron’s employees losing their jobs, their healthcare, and approximately $1.2 billion in 401k savings.
To avoid falling into the same trap, ensure you have a good team to start with. Check for operational support from service firms.
Mistimed Product
Too early or too a late launch can be detrimental to your business. As an entrepreneur, you should ensure that there is a demand for your product or service and that you have the right team to execute your vision.
Over 20% of startup failures are due to a mistimed product launch. But the silver lining is mistimed products can be corrected by pivoting your business model or finding a new market.
Java was a mistimed product. It was designed for interactive television, but the market wasn’t ready for it. So the team pivoted and focused on creating a web browser that could run Java applets and the rest is history.
Investor Issues
Investors are a startup’s best friend and worst enemy. They provide the most valuable resource for scaling up – the funds. But with that, they also gain a lot of control over the company.
Too much interference in the business’s day-to-day operations, including a lot of terms and conditions in their investment agreements are a few things that can make things frustrating and can be the beginning of the end of a startup.
Handling investors is a skill. It requires one to have a sound knowledge of term sheets, investment agreements, getting the pitch ready, and knowing the company’s worth before meeting the investors. It would be best in your interest to hire professionals to help you with the process so that you don’t make any mistakes that could come back to bite you later on.
Various reasons on this list that can make a startup fail. However, these things should not deter you from starting up. It’s not easy but not rocket science either. If you want to perish like 90% of startups, you better avoid these common pitfalls.
Lots of perseverance and being on top always about the roadmap, execution plan, and tracking the results would keep you ahead in the ever-changing market dynamics.
Have you come across a start-up that has failed? Do let us know in the comments section. If you are having an idea and looking to start on the right note, you have reached the place. Do leave us a note and we would get in touch.
