We all know that the world of startups is extremely risky, as the saying goes “9 out of every 10 startups fail.” And that’s a whopping failure to success ratio. So much so that whenever we talk about startups, it is almost inevitable to talk about failure. It is this fear of failure that discourages quite a lot of aspiring entrepreneurs. Why do so many startups fail? Is it possible to succeed in launching a startup? How can a startup survive? How can I adequately prepare to launch a successful startup? These are some questions which a bound to arise in an entrepreneurs or an aspiring entrepreneur’s mind. In my experience in setting up as well as working with several startups, the game of startups is all about managing risks.
Before we dive into the popular opportunities of failure in a startup, let me quickly talk about my analysis framework. In this article I am going to discuss a framework which will allow us to segregate and group opportunities of failure and treat each risk with specific approach. Please note this a framework conceptualized based on my experience of setting up and helping several startups over the last decade.
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The Startup Failure Mitigation & Recovery Framework
Typically, there are two ways to deal with a failure. One is obviously what to do when the failure happens, how to recover from the failure. Let me illustrate this with the following analogy. Imagine there is a leak on your roof, so during rainy season, it would be a mess. So once the rain starts, the only thing you can do is somehow try to minimize the damage and recover from it as quickly as possible. This is a reaction to the failure hence let us call it as a Reactive Recovery. But there is also another way we can prevent or be prepared for a failure well before it occurs. Before the rainy season, anticipating it you can choose to fix the roof. Given that here we are proactively trying to avoid the failure or at least nullify the effect of it, let’s call this Proactive Mitigation. This can be achieved with thorough research and meticulous planning.
The entire framework is based on these two parameters i.e., “Proactive Mitigation” and “Reactive Recovery”. If we plot these on a quadrant, we will have the following quadrants:
Manageable Zone – This is the quadrant where your failure risks can be recover from and avoidable through proactive mitigations. In this quadrant both the chances of reactive recovery as well as proactive mitigations are high. Because it can be manageable through both approaches, this risk can be easily dealt with compared to others.
Recovery Zone – In this quadrant the chances of reactive recovery are high while the chances of proactive mitigations are low. These are the risks which cannot be effectively predicted or prepared for. But there are recovery strategies and tactics which may help you come out these failures.
Proactive Zone – In this quadrant the chances of proactive mitigations are high while the chances of reactive recovery are low. These are the risks which should be avoided as long as there’s time because the chances of recovery from these failures are quite low. So, these risks should be dealt with thorough research and meticulous planning. Research will help you to identify the opportunities of the failure and planning will help you in coming up with strategies and tactics to mitigate them.
Adversity Zone – In this quadrant both the chances of reactive recovery as well as proactive mitigations are low. That means neither these risks can be effective predicted or prepared for, nor can you recover from these failures. So, this is where your Adversity Quotient and or the entrepreneurial ‘X’ factor comes into picture. Adversity Quotient is your ability to deal in times of extreme adversity and the X factor is nothing but an unknown variable, some call it luck, some call it destiny, I call it trying out a lot of things and figure out which works. Dealing with these risks are almost learning to swim in a middle of an ocean.
Top 20 Reasons for Startup Failure
In ensuring the framework to be effective, I needed a sample study. Through some secondary research I have taken the liberty to show you a list of startup failures prepared by CBInsights. So they analyzed post-mortems reports of 101 failed startups and came up with these figures. Since many startups offered multiple reasons for their failure, you’ll see the chart highlighting the top 20 reasons doesn’t add up to 100% (it far exceeds it). Also, please note these are based on analysis of 101 startups, which is not a large enough sample for accurate data and there may be a sample bias.
Interested to know more about this research? CBInsights, Startups & Venture Capital, Forbes (Infographic)
How to minimize the impact of these startup failures?
Now let us merge this data along with the. The framework can be applied to all other risks as well, but for the illustration we will consider the failures mentioned in the above section. The failure reasons are plotted as bubbles on the Startup Failure Mitigation & Recovery Matrix. The size of the bubble represents the probability or the risk.
Each risk needs to be now analysed whether it can be avoided or recovered through proactive mitigation and reactive recovery and to what extent. The Y-axis represents the reactive recovery, i.e., chances of recovery from a failure, top being high and bottom being low. While the X-axis represents the chances of avoiding failure through Proactive Mitigation, right being high and left being low.
Please note the positioning of each failure would depend on a certain degree of assumption and vary for different startups, industry, scale, geography, and available support from the eco system. Having said the, this framework can give us a platform, or an initiation point from which we can start our analysis to protect our startups from failing.
#1: Market Misfit – No Market Need (Proactive Zone)
Many Entrepreneurs fail to understand that solving market needs should be their first priority when it comes to implementing their business idea. It’s important to remember however that the solution to those problems doesn’t always have to come in a conventional way. What we need to realize is that failure isn’t necessarily due only to the fact that the market may not pay attention to our product or service but because we weren’t able keep up with current business trends and behaviors within a reasonable amount of time.
So what can be done about it? If we try an see which zone this failure risk belongs to we will realize that if we do not understand the market need and implement our business, and it fails, there is rarely anything which can be done. So the reactive recovery would be low. But can we avoid this failure using Proactive Mitigation? Of course, a thorough market study along with collaborating with potential customers for the pilot or proof of concept, interviewing and surveying target market to understand the market need and a market fit. Need help with your market research? Click here to contact BPlan Experts.
#2: Running out of Cash (Proactive Zone)
This is one of the reasons for which even large startups fail. Running low on cash means that you are not able to sustain your business without raising additional funds. This can happen in two different ways; One is the overall funds which is required to sustain your business, another one is the cash flow. Cash flow fluctuations due to uncontrolled expenses, poor ROI on expenses and delayed cash in flow may result in temporary cash shortages as well. Both long term as well as short term cash requirements should be planned properly.
Let’s see where this one fits in the matrix. Once you run out of cash, and too little time to raise funds is a bad situation to be in. There is literally nothing which can be done from here on but wait for the miracle to happen. But the risks of running out of funds can be minimized through financial planning, adequate and timely investments along with eye on key financial metrics to detect any upcoming red flags. So here also there’s very low Reactive Recovery but high Proactive Mitigation.
Need help with your Financial Planning or Startup Funding? Contact BPlan Experts.
#3: Not the right team (Manageable Zone)
An excellent team with diverse skill sets is critical to a startup success. However, ending up with not the right team or not being able to get the right people may often result is startup failure. Let us see where this risk will fall into the matrix. As a part of the Reactive Recovery, re-organizing the team, getting new talent and downsizing redundant or non-performing resources can be a measure to recover from the failure. This can only be possible if there is enough time and resources at hand to get this done. Also as apart of the Proactive Mitigation, setting up proper hiring process, dedicating resources to initiatives to attract talents, KPI / KRA based regular performance measurement, addressing employee issues and other employee engagement initiatives can help you avoid this failure. So in this case given a possible Reactive Recovery along with the possibility to avoid it through Proactive Mitigation, makes this failure into the Manageable Zone.
#4: Competition Risk – Get outcompeted (Adversity Zone)
Threats from competitors is always there for a growing startup. Even if the startup has a first mover advantage, soon it will be fighting with several new startups. This is because of a phenomenon called “Economic Pendulum”, where whenever there is a new industry which sees a lot of growth, soon a lot of companies either enter into the space or new startups appear in this space. While it is important to keep an eye on your competition and adjust your strategies accordingly but it is hard to know all of your competitors strategy or activities and this may blindside you.
For for this there are some thing with you can do but still may not be enough, hence the proactive mitigation is somewhat moderate to low. And once you have been beaten by your competition, it is difficult to recover, hence the reactive recovery is also low.
#5: Pricing or Costing Problems (Manageable Zone)
Pricing and costing issues are reported as one of the primary problems behind a startup failure. This is because pricing a product or a service correctly, is difficult in a scenario where the some costs of a particular company are unknown, especially because of the customer acquisition cost for a startup can be volatile.
This is one of the risk which is fairly manageable. With Proactive mitigation, there are several pricing strategies which can be implemented based on the market and competitor analysis. Also, when there are signs that the pricing or costing has gone wrong, quick initiatives can be taken to fix and recover from it.
Need help with your pricing or costing strategies or research? Contact BPlan Experts.
#6: A “User Un-Friendly” Product (Manageable Zone)
When we create a product or a process of engagement, it is important that they are intuitive and user friendly, may it be an user interface of an app or a process. In case user find it difficult to use your product then the market acceptability will be low. Once you get the user feedback, it can be fixed through reactive recovery. It can also be avoided through collaborating or involving end users as beta users so that their inputs can be incorporated before launch.
#7: Business Model not properly worked out (Proactive Zone)
Failed founders seem to agree that a business model is important. This includes business channels, revenue model, operations model etc. A robust business model is extremely critical to a successful business. A startup team must spend adequate time to research, plan and execute a workable business model well in advance before implementing their business. However we must also remember that as the business is implemented market feedback plays in essential role in tweaking the business model.
While minor tweaking may be an option for reactive changes but the foundation of a robust business model can be achieved through proactive planning.
#8: Poor Marketing (Proactive Zone)
It’s critical to know how to attract the attention of your target market and turn them into leads and customers if you want your venture to be successful. Half of your marketing budget will go to waste, but it is important to know which ones doesn’t. Marketing, creating a brand, influencing awareness etc. all takes quite a lot of time. Today’s marketing efforts would yield result sometime in the future. So at the end, improving your marketing efforts through Reactive Recovery wouldn’t yield immediate results. But through Proactive Mitigation, aligning your marketing activities to the marketed feedback and continuously measuring and tweaking your marketing initiatives can have better marketing strategy.
If you need help with your marketing plan, contact BPlan Experts.
#9: Ignoring Customers (Proactive Zone)
Ignoring users is a tried and true way to fail. Tunnel vision and not gathering user feedback are fatal flaws for most startups. When entrepreneurs spent way too much time building it for themselves without getting feedback from prospects — it’s easy to get into tunnel vision. Reactively there’s little or none to be done. But with adequate planning and market research along with pilot launches with clients and continuous client communications, gathering feedback and pivoting accordingly can be achieved through proactive mitigation.
#10: Mistimed Product (Adversity Zone)
If you release your product too early, users may write it off as not good enough and getting them back may be difficult if their first impression of you was negative. And if you release your product too late, you may have missed your window of opportunity in the market. Timing is everything when it comes to product launches. But product launch has several underlying activities which is related to all aspects of business. So to time your product perfectly, strategic and operational planning is the key. However, even after these due to economic, political, competition, social and other external factors, product timing may be disrupted.
#11: Lose Focus (Adversity Zone)
Getting sidetracked by distracting projects, personal issues, and/or general loss of focus was mentioned 13% as a contributor to failure. Given the entrepreneurial journey is so uncertain and tedious, without much returns in the initial phases, it is but natural to lose focus. Also, the focus of the entrepreneurs should be core activities such as developing product, sales, marketing, fundraising and managing customer relations. It is easy for a successful startups to lose focus by diversifying to fast or get involved in vanity activities such as awards, media coverages and personal branding. Unfortunately, if your business fails due lack of focus there isn’t much you can do, proactively or reactively.
#12: Disharmony with Investors / Co-founders / Team (Adversity Zone)
Interpersonal discord is always fatal to the business. A startup is a end resultant of all the team members aligned efforts, especially the co-founders. There isn’t much you can do in such cases, but somewhat mitigated by spending time in understanding each other before partnering up, hiring or fund raising. For co-founders, understanding each others key skills and working type is important along with drawing out the responsibilities and contracts. In case of investors, understanding the investors aim and vision is important along with understanding the reporting responsibilities and term sheet clauses is crucial. For team members, creating a transparent culture promoting respect for individuals and encouraging constructive confirmation may be a solution.
Getting these done might be overwhelming. Seek professional advice from BPlan Experts to avoid costly mistakes.
#13: Pivot Gone Bad (Adversity Zone)
Pivots are often needed for a startup to sustain and grow they can go horrible and ends up in the startup failure. It should be a calculated affair, where changes to the business model are made, hypotheses are tested, and results are measured. Extensive Research, detailed planning, meticulous implementation and keeping an eye on the key metrics is crucial to a successful startup. Also having a business continuity plan or a plan B can come handy. However, even after these due to economic, political, competition, social and other external factors, your pivot may fail depleting all your resources to spring back. Every pivot is a leap of faith, and there is always a chance of falling with every leap.
#14: Lack of Passion (Adversity Zone)
Entrepreneurship is an irrational choice for a career. Rephrasing what Steve Jobs said, “People say you have a lot of passion to be an entrepreneur, and it’s totally true and the reason is because it’s so hard that if you don’t any rational person would give up. It’s really hard and you have to do it over a sustained period of time. So if you don’t love it, if you’re not having fun doing it, if you don’t really love it, you’re going to give up. And that’s what happens to most people, actually. If you really look at the ones that ended up being successful in the eyes of society, and the ones who didn’t, often times it’s the ones that are successful love what they did so they could persevere, you know, when it got really tough. And the ones that didn’t love it, quit. Because they’re sane, right? Who would want to put up with this stuff if you don’t love it? So it’s a lot of hard work and it’s a lot of worrying constantly and, if you don’t love it, you’re gonna fail. So, you got to love it, you got to have passion.” You can fix or mitigate lack of passion.
#15: Location Issues / Failed Geographical Expansion (Proactive Zone)
Location affects your startup in several ways, finding your customers, finding talent, costs or operations etc. Location issues can be proactively mitigated through market research and location surveys. Geographical expansion however can be somewhat mitigated by planning and research however due to external factors it may be difficult.
#16: No Financing or Interested Investors (Adversity Zone)
Tying to the more common reason of running out of cash, a number of startup founders
explicitly cited a lack of investor interest either at the seed follow-on stage (the Series A
Crunch) or at all. Before understanding the inherent nature of the risk here are some thumb rules.
- Not all businesses are fundable – So depending on external funding may not be the way for all businesses
- Your business model must be based on profitability and robust revenue model. In case profitability isn’t possible or aggressive growth is required then funding may be an option.
- In case the funding route is taken we must understand the responsibilities it comes with and importance of the investors
- Funding planning is extremely important and so is your valuations and key metrics.
Unfortunately if you run out of cash or do not get funding there’s nothing you can do about it.
If you are interested in knowing about startup funding check out the following videos:
#17: Legal Challenges (Recovery Zone)
Sometimes a startup can evolve from a simple idea to a world of legal complexities that can prove to be a core cause of shutting a startup down. Legal issues can be mitigated or recovered from having a legal counsel to advice you right from the beginning or when you realize the failure.
#18: Do not use your connections or network (Proactive Zone)
We often hear about startup entrepreneurs lamenting their lack of network or investor connections so we were surprised to see that one of the reasons for failure was entrepreneurs who said they did not properly utilize their own network. Answer is simple, start networking asap.
#19: Burn Out (Recovery Zone)
Work life balance is not something that startup founders often get and so the risk of burning out is high. Burn out was given as a reason for failure 8% of the time The ability to cut your losses where necessary and re-direct your efforts when you see a dead end was deemed important to succeeding and avoiding burnout as was having a solid, diverse and driven team so that responsibilities can be shared. But when the burn out happens, give your self some time, taking a break, seeking external help can help your recover.
#20: Failure to pivot when necessary
Not pivoting away or quickly enough from a bad product, a bad hire or a bad decision quickly enough was cited as a reason for failure in 7% of the post mortems. Dwelling or being married to a bad idea can sap resources and money as well as leave employees frustrated by a lack of progress. Initially the company should be nimble and agile to pivot as per the market feedback. So listening to the market is essential and can be mitigated with proactive research. However, when the company is larger, it is important to create a culture of innovation is important for sustainibility.
Please note, as I have earlier mentioned, this is framework and the risks and their mitigation strategies and impact may differ from startups to startups. Also the failures listed, since they are based on a sample of 100 startups, there may be other startup failures reasons which may have more impact. You can use the Startup Failure Mitigation & Recovery Framework to analyze various risks which your startup may face and have an adequate action plan to either mitigate or recover from them. Planning may not ensure success but it definitely reduces the odds of failure.
If you are interested in know about my perspective and experience on business and startup, please feel free to check out my YouTube channel at Youtube.com/arnabarray and my blog at www.arnab.co.
