Startup Playbook

Why Do Most Startups Fail?

Starting a new business may be difficult. If it’s your first one, there is a great chance you will have trouble understanding the “simplest” basics and uncover a trillion other things along the way.

What industry should you take on and how do you make sure you don't get bored with it in five years? What kind of product do people want? What customers can you target? How are your potential competitors doing?

All these questions can trigger stress and anxiety in an aspiring entrepreneur, especially given a large number of failed startups. But Fe/male Switch gets you –  although starting a business from scratch is indeed scary, it shouldn't stop you. You can learn from the failures of other entrepreneurs, in order to notice and prevent common mistakes, before they affect your company.

WHY ONLY 1% OF STARTUPS TAKE OFF AND WHY THAT’S NORMAL

You can probably guess how many physical, monetary, and mental resources go into implementing a startup idea, supporting it, and achieving scalability. The formula for success includes many factors, each of which must add up and form a single puzzle for the successful mechanism to work.

Everyone in the startup ecosystem invests their time, health, money, and their own resources into the startup, but only a small percentage of people do so with exceptional finesse. Entrepreneurs who know how to manage their resources wisely tend to have a higher chance of success than others.

However, even if an entrepreneur makes the wisest decisions (even according to their investors), startuppers are not always able to predict changes in the market or anticipate the actions of their competitors. Inevitably, many things can go wrong and not everything can be controlled along the way. 

Recent research shows that around 90% of startups fail over a period of years: 

  • 21.5% of startups fail in the first year
  • 30% fail in the second year
  • 50% fail in the fifth year
  • 70% fail in the tenth year

And yet, people keep doing it. Startups compete with each other and go a long way of trial and failure before they become stable and able to strive for that sexy upward trajectory called "scale.”
Scalability is indeed every startup's wet dream, but before that even happens, every startup goes through different stages. And not many go through every one of them. In fact, each stage is celebrated because in theory (yes, in theory – reality bites) it means that the roadmap goals are steadily being achieved. 

But oh well, shit happens. And some things may go out of hand VERY quickly. Russian Forbes imagined the existence of a 100% probability of success and subtracted the odds of success if things go wrong to see what probability one could arrive at. Below is the summary of their conclusions. 

Idea and Business Model (- 50%)

Your idea may sound promising but the business model does not allow the startup to scale.

For example, a startup that spent a lot of money on R&D and forgot to estimate and confirm demand has almost zero chance of success. However, if the idea is well-implemented and there are no strong competitors before the launch, there is a chance. Except that competitors will almost certainly appear in the FUTURE, so the outlet "cuts off" your 50% chance of success.

Market ( -25 %)

An overestimation of the target market, misunderstanding of the balance of power and mechanisms of entering it, failure to take into account the need for legislative changes to spread the innovation invented by the startup reduces the probability of the company's success to zero.

Still, even in a situation where a startup has made a qualitative assessment of the market, market demand indicators, the emergence and development of competitors are still difficult to predict at the start. So it is necessary to halve the startup's chances to "take off" in this case scenario as well.

Founders ( -12.5%)

A great founder is one who has extensive experience and serious personal and team accomplishments, with leadership qualities and an understanding of human psychology. A great investor always checks the founder's merits, before investing in them, and if they do not do so, there is a high probability of a drastic drop in success, due to the founder's incompetence. 

Sage statistics also emphasize that almost 60% of successful startups are founded by at least two partners, so a situation where a startup is led by one founder has additional risks. 

That leaves us with a 25% chance of rapid growth. There are still risks of conflicts, of one of the co-founders leaving the project, as well as risks of a lack of business competence among young entrepreneurs. Again, let's subtract a conditional 50% from the remaining chances.   

Team ( -6%)

A good founder carefully selects team members, allows them to grow, and participates directly in the processes. Sometimes, investors have difficulty assessing the potential of the team. This is why situations arise, in which problems and chaos (layoffs, conflicts, etc.) ensue after the deal is closed.

A weak and unbalanced team can not only undermine processes but also prevent the startup from focusing on business development and achieving scale, so out of the remaining 12%, 6% remains for success.  

Investors ( -3%)

On the one hand, startups that decide not to raise external financing cut off a whole group of risks from themselves. But on the other hand, for some startups turning down an investor's money may be tantamount to failure. 

The investor may be passive or active, they may aim to help the project any way they can, or they may simply aim to maximize their share, without doing anything at all, and make you lose your mind. In addition to the potentially rewarding result, the terms of the deal can be an unbearable burden on the entrepreneur, and that's a big risk. 

In the world of investment, the risks are very high, so we have to cut off another half.

What's the bottom line? 

We got a 3% chance of success in the baseline scenario for a typical startup. That being said, you have to remember: the odds can be "zero" because of every component of the new business we're considering, and it can happen both at the start of the journey and along the way.

10 REASONS WHY AND HOW TO AVOID STARTUP EPIC FAILS

Let’s see. 
  1. No market need. Don’t make a product/service no one gives a crap about. Study people’s needs and pain points. 
  2. Ran out of cash. Seek funding in advance (not when you’re out of money)
  3. Not the right team. Select team members carefully. Listen to your logic and your intuition. 
  4. Get outcompeted. Competition cannot be avoided. Keep your competitive analysis up to date. 
  5. Pricing/cost issues. Decide on costs wisely. Set your prices wisely. 
  6. Poor product. The price of the product/service must justify the quality at the first stage of development. Later, if you’re famous and hyped enough, you can go bonkers with the prices. Word. 
  7. Need/lack business model. Make sure your business plan works to your advantage. 
  8. Poor marketing. Be creative and smart about your campaigns. Hire unique talents. 
  9. Ignore customers. Audience before product. Communicate with your future customers. Post startup memes on LinkedIn. 
  10. Product mis-timed. Analyze the current needs of your target market and current trends or whatever TikTok promotes these days. 
  11.  Lose focus. You snooze, you lose. 
  12.  Disharmony on team/investors. Work out your relationships with the team. Go to therapy if needed. Post memes and achievements on your Discord server to cheer everyone up once a week. 
  13.  Pivot gone bad. Pivot: you might not handle it but at least you tried. 
  14.  Lack of passion. If you hate or are bored by the industry you’re in, don’t even bother anymore (or try again?).
  15.  Bad location. Consider changing the location of your business for networking and funding perks. (no, Costa Rica is not actually a pure tax haven but you do you)
  16.  No financing/investor interest. Apply for a grant. Join an accelerator. Incubator. A network of investors. Something. Don't steal from your family and friends. 
  17.  Legal challenges. Pay your taxes and make sure your legal paperwork is LEGIT and that everyone is aware of their responsibilities and consequences. 
  18.  Don’t use network/advisors. Sometimes it's not what you know that matters, but who you know that makes the difference. 
  19.  Burn out. Sleep and rest at least once in three days before your co-founder have to call an ambulance. 
  20.  Failure to pivot. You tried. 

WHAT ELSE TO LEARN FROM STARTUP MISTAKES 

  • Do your research.
  • Be patient and take your time to create new ventures or change your strategy.
  • Analyze problems thoroughly.
  • Honestly measure your performance.
  • Don't make the same mistakes over and over again.
  • Receive feedback from customers.
  • Hire people who will complement each other. 
  • Invest in constant self-education. It’s what we DON’T know that’s important. 

HOW TO NOT FAIL

Become part of the Fe/male Switch community to learn more about the startup life and what it takes to live one. You can and will learn a helluva lot if you join us, but in the meantime, we wish you all the best!

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