Why do most startups fail?

Recent studies show that 90% of startups fail. And most of them within the first few months. Why is that so? What does the other 10% do differently to succeed? Let us find answers to these questions.

I am no expert on startups. I am not a founder of a company either. Sorry to disappoint, but I am merely an observer of the trends and an enthusiast on the subject. I have an idea and I would like to start a company of my own. So I did research on startups and entrepreneurship. This article is a summary of what I learned.

What is a startup?

Any company is called a startup in its early stages. The following are what startups usually go through before becoming a company. An individual or a group of people with an idea present their ideas in front of potential investors. Once they get their investment, they register the company legally, hire some people and work on a “beta” version of their product/service. A startup is born. “Beta” version basically means a version of the product/service that will be used for testing. The product/service will be tested by a group of people and it will be constantly improved upon based on the feedback from the testers. Once all the testing and improvements are done, the product/service is made available to the public. Revenue is generated and the startup starts hunting for their next investment. If a startup successfully goes through these stages, it will be called a company henceforth and not a startup.

Why do startups fail?

Based on what I’ve learned, there are two main reasons why a majority of startups fail.

What the people need

Most of us get new ideas almost every day. But sometimes you might come across this one idea which you feel is a “Million Dollar Idea”. The idea excites you. So you move on to starting a company based on that idea. And there it is, a startup!

This is not the way to start a company. You must never start a company just because you have an idea. You should start a company only if your product/service is something that people actually need. But most startups skip this part based on the assumption that they know what the people need. Once they’ve invested in the idea, launched the product/service, and failed in selling the product/service they’ll realize that people actually do not need their product/service. All their time and the investors’ money, down the drain.

So how can you find out whether your product/service is something that the people need? Talking to potential users, i.e., people who might use your product/service. There is no other way for figuring it out. You have to talk to a lot of potential users and get their feedback. The best method is to ask them directly. People tend to give you better feedback if you ask them questions directly. Presenting your ideas in expos and startup challenges is a good way of collecting feedback from people directly. Another way to get feedback is to use online forums. Even though it will help you reach a lot of people quickly, it isn’t that effective. People tend to hide things in their feedbacks while sharing them on public forums. Some even shy away from giving feedback.

Once you’ve collected feedback from potential users, you will be able to determine if it is worth investing money and your time on your idea. If you get suggestions from people on how you could improve the product/service, make those changes and start collecting feedback again. Never move onto getting investment unless you are sure that your idea is now something that people really need. There is no shortcut. This is the only way to make sure your idea actually is a “Million Dollar Idea”.

Facing failures

A startup will most definitely face a lot of ups and downs. Most startups quit when they face their first down. Even after you’ve collected feedback from people and made sure that your product/service is something that people need, there are a lot of things that could go wrong. The only way to make sure you don’t quit when things go south is to make sure you are passionate about the problem you’re going to solve. If you are not passionate about the problem you want to solve, you will not have anything to motivate you to get back up after you’ve failed. You will not think that the effort is worth it. But if you have the passion, you will remain motivated even after you fail. That passion will also motivate you to continue working and make the company better after you’ve succeeded. A company isn’t successful if it doesn’t last long. A company is successful if it keeps moving forward and outlasts its competitors.

The ‘Why’

Now that we’ve seen the reasons why startups fail, let’s see what makes the most successful companies out there are so successful.

The following is inspired by the works of Simon Sinek. According to him, most companies in the world know what they do and how they do what they do. But only the most successful companies in the world have a clear idea of why they do what they do. The ‘Why’ of a company plays a huge role in its success because the ‘Why’ is at the core of all our actions. We do things because we are driven by a cause, a belief (the ‘Why’). We instantly trust and form good relationships with other people who are driven by the same beliefs as we are. The same goes for a company. People trust or respond more to companies that share their beliefs. People buy products/services from companies who share their beliefs. A company which is clear about their ‘Why’ attract better workers who also believe in what the company believes in. And that’s what makes a company successful. Loyal customers and faithful workers.

So the next time you have an idea for a business, make sure the idea is something that the people actually want and that you are passionate about the idea. And most importantly, do not start a company just because you want to make money. Such companies are most likely to fail. A company should always be founded and run based on a cause, a belief, a ‘Why’. For example, Facebook aims at improving connectivity between people. Google aims at making all the knowledge on the internet easier for people to access. Like so, most of the successful companies on the planet know their ‘Why’.