Avoid at all costs: 5 reasons why startups fail

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how to avoid startup failure

Running a business comes with risks, but you should be smart enough to address these at the start, so you can increase your chances of success

The graveyard of startups is growing. In fact, twice a year CB Insights conducts a post mortem on some of the most reported startup failures, citing the reasons why doors are shuttered. Founders and investors provide their reasons why the companies failed, and these provide some good lessons for new startups who want to avoid death. Here are a few of the most recent failures and their “causes of death.”

1. Unmanageable debt

ChaCha was a great idea – a mobile answering service. Users could ask any question and receive a researched answer. Sounds a bit like Siri, which is a startup that is now a big success. So what happened to ChaCha? It could not manage its debt. It began as a human-driven search service long before Google was interested in long-tailed search questions and reached good success. But competition drove advertisers away, and, even though it changed to a virtual setting, the revenue was just not there. Its main investor pulled its money out and ChaCha had no choice but to close. While this is not the case with all startups, managing the financial risk is huge.

Also read: 4 major financial risks that can slow down your startup

The lesson? Really, it’s two-fold. As you seek investor funding, be certain that you are completely up to date on what competitors are doing and the new technology you must incorporate in order to stay competitive. Allocate a good amount of resources to R&D.

2. All your eggs in one basket

Dealstruck began as a crowdfunding resource for small businesses whose owners were not able to get financing from traditional lenders (banks) but whose ideas were certainly viable. The company was like so many other crowdfunding startups, many of which are still in business. Dealstruck died because one major deal died. Startups that depend upon a single deal to put them over the top are engaging in risky business, indeed.

The lesson? Broaden your funding base as well as that customer/client base. Ventiv also suggests conducting regular risk engineering to assess your current shortcomings and “patch the holes” before they turn into a large void, consuming your company from the inside.

3. Incorrect human resources allocation

It’s great to open an online e-commerce business, but Shoes.com, even though in a highly competitive market, just did not figure out that it needed as many fashion consultants as it did techies. And the company itself admitted that it did not allocate enough resources to customer service.

Also read: Startup or fail: 5 major factors that can make a big difference between success and failure

The lesson? Understand your customer base and its wants and needs. All the fancy “eye candy” of tech will not replace the human element of staying on top of customer priorities.

4. Not understanding legal matters and restrictions

Consider the disastrous case of Vidangel. This was a popular startup that gave its consumer the ability to delete inappropriate and offensive scenes and language from television shows and movies. A great idea. It was so popular, in fact, that it raised US$5 million in crowdfunding investment and another US$10 million of venture capital, just in the month of December, 2016.

Unfortunately, the big boys in the movie industry were not impressed and went to court, claiming that the company was an illegal video streaming enterprise. They won a court injunction, which has virtually shut the business down while a lawsuit is pursued. While Vidangel is launching an appeal, it does not look promising.

Luminosity learned the same lesson when the U.S. Federal Trade Commission forced it to remove all of its “brain claims” that were not based on scientific evidence.

The lesson? Do your due diligence and get expert legal advice if your startup is moving into areas that are subject to government regulations and restrictions.

5. Not watching your reputation

Social commerce is huge today, and consumers rely more on other consumes’ recommendations than they do on brand advertising. As well, a publicised “scandal” or posted angry rant about your product or customer service can kill your brand. Case in point: Uber. This month it will be doing damage control because a former employee posted accusations of sexual harassment and gender discrimination. Admittedly, this is a large and successful company with the resources to launch a good PR mitigation effort. You may not have the resources to do so.

The lesson? Monitor everything that is said about you. Train your staff on ethical procedures and appropriate response to customer issues and complaints. A few well-placed condemnations can injure your brand and drive revues into a ditch.

Also read: Good data protection policies enhance trust in HR consultancy

There are more

Many more risks await startups than the five mentioned here. Risk to physical property, for example, can include such things as damage to physical facilities or faulty products which result in lawsuits. Protecting customer/client information and developing the security measures to prevent fraud are others. You have to plan for the obvious landmines in advance, so that you respond intuitively. And the smaller ones will also be much easier to deal with.

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