Most entrepreneurs believe that they are going to create the next big thing in the startup world. However, as per CB Insights, 70% of upstart tech startups fail.
There are a lot of reasons why startups fail which could include a lack of product-market fit, insufficient capital or just bad marketing. Many of the startups that fail do have a good underlying idea and plan but aren’t able to pull it off because of some basic startup mistakes.
In this post, we have imagined what startups would say to their founders if they could warn them ahead of time of impending failure.
#1 “You make me want to have a better business model.”
Inspired from “You make me want to be a better man.” from As Good as It Gets, 1997
Having the right products or services to sell is not enough to have a successful business. An improper business model could fail even the best of startups. A business model is the backbone of a business and determines the economic and commercial viability to make money and value.
Some of the reasons why a business model could fail are:
- The model generates more costs than the revenue that it earns from the customers. This could happen when you have picked up the wrong revenue model or pricing structure, or you have underestimated the costs of your activities and resources.
- You failed to establish proper channels to reach and deliver value to your customers. Even a great value proposition is a waste if your potential customers don’t know about it.
- Your business failed to establish customer relationships that retain your existing customers and even grow.
One of the main aspects of a successful business model is the CAC / LTV Rule. The rule says that the CAC (Cost of Acquiring a Customer) must be less than the LTV (Lifetime Value of a Customer).
CAC = Total cost of sales and marketing activities / Number of customers converted during that period
LTV (business with recurring revenue) = Monthly recurring revenue from a customer / Monthly churn rate
For businesses with a one-time fee, the LTV would be the gross earning from a customer including installation and additional expenses.
For a successful business model, the LTV should be at least thrice your CAC. Every business has different kinds of CAC depending on its nature.
Now for businesses that have a high CAC, it’s of utmost importance to have a very high LTV, otherwise, it will topple the business.
The comparison is simple; the revenue you earn from your customer should be much higher than the cost of acquiring them, for the business to thrive. You also need to focus on optimizing your CAC and trying to recover it within 12 months.
#2 “Frankly, my dear, you should give more damn about all that cash you have been burning.”
Inspired from “Frankly, my dear, I don’t give a damn.” from Gone With the Wind, 1939
Many of the startup founders are engineers and technicians at heart who want to build the perfect product for solving the identified problem of the market and launch only after that.
But that can be a huge problem when you need to cash out as early as you can for the company to keep its doors open.
Cashflow problems usually occur because of factors like low-profit margin, small recurrence purchases, high payroll costs, high churn rates, and delayed credit sales.
The more these situations occur, the more your company keeps running out of cash, and that’s one of the causes why startups fail.
Startups that are funded by private equity firms or other external investors, should focus a lot on KPIs that they need to show for the next investment, like their burn rate.
Failing to achieve the KPIs, and incurring non-thought through expenses with a low ROI can push the business down the drain.
Few ways to avoid the cash burn are:
- Keep track of accounts and estimate the period for which the company can run as per the current circumstances
- Management should secure funds in advance whenever there might be a need for funds
- Keep tracking KPIs that are necessary for generating the next round of funding
- Get in touch with more than one investor to increases chances of funding
#3 “I see a dead-end.”
Inspired from “I see dead people.” The Sixth Sense, 1999
One of the main reasons why startups fail is running into problems related to the market. Behind every successful product or service is a pre-existing problem that needs to be solved. If your startup is solving that problem for the potential audience, your business is likely to grow. But if it isn’t, no one is going to spend on your products or services in vain, which means there’s a dead end.
Some of the reasons why startups could face dead-ends are:
- The value proposition isn’t compelling enough for the buyers to purchase your products or services. Maybe your product is great but it is unable to provide the kind of value that your target audience needs. In that case, it’s highly unlikely that your products will sell.
- Your market timing is incorrect. Many times a product can solve the problem for potential customers but the customers aren’t completely ready to accept the solution. For instance, we all know how big Netflix is today. However, what many don’t know that it was founded in the year 1999, and the kind of services it was offering were ahead of its time. Even it had to go through a lot of ups and downs to reach where it’s today. They had to constantly experiment and tweak their business model to be able to meet the market needs and survive.
- The purchasing power of your target audience is lower than the cost of your products
#4 “The marketing offers you are making will definitely get refused.”
Inspired from “I’m going to make him an offer he can’t refuse.” from The Godfather, 1972
One of the common startup mistakes is poor marketing. Bad marketing can lead to the failure of the best of products.
Many startups lack a good marketing strategy, because of which they aren’t able to get their products out there in front of people.
Some companies also focus on singular marketing techniques like email marketing, or content marketing. But what they should do instead is combine various marketing techniques to synergize all efforts.
If all your marketing techniques complement each other, a lot of problems of your business are going to solve on their own.
#5 “Keep your friends close, your enemies closer, but your team the closest.”
Inspired from “Keep your friends close, but your enemies closer.” from The Godfather, Part II, 1974
One of the biggest startup mistakes that lead to failure is improper management and disharmony within the team. This is such a huge deciding factor because effective management can ensure that all the above issues are avoided. On the contrary, improper management can cause all the above-mentioned problems and ultimately be the core reason why startups fail.
Team disharmony can lead to the below-mentioned problems and even more:
- Lack of study and research about the market
- Ineffective marketing strategy or poor execution of it
- Inability to maintain a healthy cash flow for the company
- Inability to make decisions that are in the best interest of the startup
- Incapacity to meet the deadlines
- The company not being ready for opportunities like holiday sales
- Lack of coordinated effort towards success
There are a lot of startup mistakes that can lead to the failure of an existing startup, but we have highlighted the most common ones here. These are the ones that cause the biggest damage but if identified, can be taken care of easily with proper thought and planning.
Don’t let a great business fail because of a few wrong decisions. Go through the guide carefully and try to compare it with your startup and analyze whether your startup is going through similar issues or not.
It’s great if it’s not, but if it is, perhaps there is still time to take the necessary steps and save your startup from failing.