Startup diagram

Reasons Why Most Startups Fail

Seventy percent of startup tech companies fail in less than two years. While this statistic may not be surprising to most people, this number proves it is difficult to create a successful startup technology company.

In addition to a bad business model, most startup failure reasons have to do with money or the product, but there are many others. It is important for tech companies to know the pitfalls to avoid if they want to prosper.

If you own a tech startup, work for one, or think about creating one, the following information will be helpful for you.

Startup Failure Reasons

 

Finance

All startups need money to survive. A tech company may be self-funded by the founder who uses his savings, takes out a bank loan, or uses a credit card. It is also popular for anyone starting a tech company to ask friends and family for financial help. Founders who need the most money, usually rely on funding from outside sources in exchange for a percentage of the company. This can include angel investors, crowd-funding, incubators, and accelerators. Here are some ways money can lead to the downfall of a tech company:

Disagreement with investors

Just because an investment is made into a company, the investor or investors can still control the financial decisions. The founder or founders of a company must create a plan that includes how much money will be spent and budgeted ahead of time. It is always smart to research the cost of all business expenses before creating the budget to avoid disagreements and include it in the investor’s contract. If money is needed later that was not part of the contract, anyone investing can always say no. This can stop your company from getting to the next level.

Ran out of cash  

If a startup founder budgeted the money for his company wisely, he will also include an account for unforeseen or emergency expenses. This can prevent the startup from running out of cash. Nothing is certain in life or business, but there will always be obstacles when creating any type of plan. The more detailed the financial plan is for a business, the more likely it will succeed in the future.

Price or cost issues

Sometimes, the development team or contractor you choose to work with will need more money to complete the work. This is another example of why research about the costs associated with a startup is so important. If you know ahead of time what you should pay, you can discuss it with the people you choose to hire. Once you make it clear you are knowledgeable about the work you need to accomplish, you can ask the appropriate questions to avoid price increase pitfalls.

Product

It is imperative that a startup has a great product. Researching the market to learn about the target audience is key, but if the product isn’t made well, no one will use it. A bad product is one of the strongest reasons for a company’s failure. A minimal viable product will help a startup avoid some of these common product issues.

Premature scaling

Your product, along with your team, customers, business model, and finances must always be monitored, and closely. Never make decisions regarding one of these aspects without paying attention to how it will affect the others. For instance, if an influx of money comes to the company because of more capital, it could be a good time to hire more employees. Before you decide, examine if that fits within the business model. How will new hires impact the product or make changes to it? How will product changes impact the customers? There is such a thing as too much, too soon.

Bad Timing

It was once said that there is a time for everything, and this includes releasing a new product on the market. If your market and users were researched thoroughly, you will know if it is a good or bad time for your startup idea. Without intensive research, a larger and more popular company may already have a better, existing product available, or a competitor may beat you to your product launch date. Never underestimate the power of good timing.

Product isn’t user friendly

When you have a minimal viable product (MVP), it is easy to get user feedback to build a custom software your users will enjoy. If the target audience is unhappy and frustrated with what you created, they won’t be happy and won’t use it. They will also complain to people they know that your product is defective, and a bad reputation isn’t good for business. The more feedback you have, when taken seriously, it will improve the user experience. When your users know you value them and you fix product issues, they will be loyal and use your product for a very long time.

 

If you would like more information about a minimal viable product (MVP) and avoid startup failure, contact Dignitas Digital in Philadelphia or send an email to hello@dignitas.digital for your free consultation.