No business is inherently future-proof, no matter how big or small it may be. At some point, all companies will face difficulties that could potentially lead to their downfall.
This is especially true for startups. Given the high-risk nature of starting a new business, it’s not surprising that many startups fail. In fact, according to Failory, about 90% of startups fail within their first two years.
Of course, not all failures are created equal. Some businesses shut down because they could not find a sustainable market fit, while others made poor strategic decisions that ultimately led to their demise.
In any case, there’s always something to be learned from failed businesses, no matter the reason for their failure. With that in mind, here are 12 things you can learn from failed startups.
Validate Before Building
According to CB Insights, no market need is the number one reason startups fail.
It results from a faulty product development process in which entrepreneurs waste valuable time and money building products before even figuring out if there is a market for them.
For example, Google Glass released its product too early without conducting enough market research first.
As a result, it failed to gain traction with consumers and was eventually discontinued.
To not fall into the same trap, you must validate your product before starting to build it.
To do the same, follow this process –
- Identify the job that needs to be done. It can be anything from baking bread or taking the user from place A to place B.
- Focus on the problems that prevent the user from being able to do the job. This will help you develop your value proposition.
- Recognise the benefits that the user will get from getting the job done. This will help you identify whether the user will pay to get the benefit or not.
- Once done, build a product hypothesis that helps the user complete the job by solving their problems and helping them get all the benefits.
You can do the same by filling the value proposition canvas. This will help you understand the user, what they want to achieve, and how you can help them.
Build An Eligible Team
Having skilled and experienced team members is not only important to secure funding but also to have a successful startup. Your team should be passionate, committed and have the relevant skills to achieve the company’s goals.
Over 30% of startups fail just because their management team is not good enough to handle issues.
You can avoid this by ensuring that your team has the right mix of complementary skill sets and continuously evolving them as your startup grows.
Your founding team should constitute people who are:
- Passionate – People who have a genuine interest in the problem you are solving and are committed to seeing it through.
- Skilled – Individuals with the relevant skillsets needed to execute on your business idea.
- Experienced – Team members who have been through the startup journey before and can provide valuable insights and guidance.
Don’t Try To Do Everything Yourself
One common mistake that first-time entrepreneurs make is trying to do everything themselves.
This is often due to a combination of factors such as wanting to save on costs, not wanting to give up control, and simply not knowing any better.
Instead of trying to do everything yourself, delegate tasks to others on your team or outsource them altogether. This will free up your time to focus on the most important aspects of your business.
Build A Viable Business Model
Your business model states how you operate and make money. It is the foundation of any successful startup. Without a solid business model, your startup will quickly crumble.
There are many different types of business models, but all successful startups have one thing in common: they generate revenue.
If your business model isn’t focused on generating revenue in the long run, you’re not a viable business.
A perfect example of failure due to a great value proposition but a faulty business model is the case of Quibi. The mobile-oriented streaming service was shut down just six months after it launched because it developed its business model around a subscription service of short-length content, which people were already getting on YouTube, TikTok, etc.
Don’t Be Afraid To Pivot
Pivoting refers to making a strategic change in your business model to better adapt to the market.
Nokia is a great example of a company that didn’t pivot soon enough. The Finnish company was the world’s leading mobile phone manufacturer in the 2000s. But it failed to see the rise of smartphones and lost its dominant market position.
Blockbuster is another company that didn’t pivot soon enough. The American entertainment company went bankrupt in 2010 after failing to embrace the digital age of streaming services like Netflix.
To avoid making the same mistake as these companies, you need to always be on the lookout for changes in your industry and be willing to make the necessary changes to your business model.
Don’t Underestimate The Power Of Marketing
Startups have an inherent problem – they have to create a market for their product. And that’s not an easy thing to do.
You need to have a great product, but that’s not enough. You also need people to know about it and believe in it enough to buy it. That’s where marketing comes in.
Many startups make the mistake of thinking that a good product will automatically attract customers. But the truth is, if no one knows about your product, it doesn’t matter how great it is.
Remember that marketing is not just about selling your product – it’s also about building up your brand and making people aware of who you are and what you stand for.
Don’t be like Tutorspree – the Airbnb for tutors that wanted to disrupt the tutoring space but ended up going out of business because they focused too much on the product and not enough on marketing. The company relied primarily on Google search engine optimisation (SEO) for the traffic, but it didn’t prove to be sustainable in the long run.
When it comes to marketing, think about what channels you can use to reach your target audience. And don’t be afraid to experiment – it’s the only way you’ll find out what works and what doesn’t.
Sign Better Contracts
Carefully read and understand every contract you sign – be it with cofounders, vendors, contractors, or customers. Don’t be afraid to ask for help from a lawyer if you’re not sure about something. It’s better to be safe than sorry.
This seems like common sense, but it’s something that many startups overlook – especially when they’re starting out.
There are startups that failed due to flawed contracts with cofounders, vendors, and even employees.
Your shareholder agreement, for example, should clearly state the roles and responsibilities of each founder and what will happen if one of you wants to leave the company.
NDAs (non-disclosure agreements) are also important, especially if you’re working on something that could be considered a trade secret.
Term sheets and other agreements signed with investors should also be watertight – you don’t want any surprises down the line. Specify the roles and expectations of both parties in clear, concise language to avoid any misunderstandings.
And Employees should sign contracts that state that any intellectual property they create while working for your company belongs to the company – not them.
Even though a successful startup, Facebook made this mistake with their original cofounder Eduardo Saverin, which cost them dearly.
Keep An Eye On The Competition
The last thing you want is to be caught off guard by a competitor.
Keep track of what they’re doing, what new products or services they’re offering, and how their marketing messages compare to yours. If you see them starting to eat into your market share, take action immediately.
Facebook did this when Google introduced Google Plus. They quickly responded with their own version, Facebook Groups, which helped them keep their dominant position.
Work on your positioning strategy as it will be one of your most powerful marketing tools against your competition.
Take Snapchat, for example.
They didn’t just develop a new messaging app; they positioned themselves as the anti-Facebook.
This resulted in them being extremely popular with young people looking for an alternative to Facebook.
Digg, on the other hand, failed to adapt to the changing landscape of the internet and were eventually eclipsed by Reddit.
Your positioning strategy should be fluid and always evolving to stay ahead of your competition.
Manage Funds Properly
Liquidity is key for any business, but it is especially important for startups.
You need to make sure to allocate your funds properly and have a solid plan for how you are going to spend your money. Make sure to have someone who understands startup finances on your team to help make sure you are making the best decisions with your money.
Zirtual, an online virtual assistant service, is a great example of a startup that ran out of money and had to shut down. The company raised over $5.5 million in funding but ended up channelling most of it to increasing the workforce rather than investing in other business areas. This ultimately led to a high burn rate and the company shutting its doors in 2015.
Premature Scaling Is Always Bad
Premature scaling refers to a company growing too fast, too soon. This growth can be in the form of hiring too many employees, expanding to new locations, or investing in too much inventory.
This can happen when a startup raises too much money and then tries to grow the business at an unsustainable rate.
One prime example is Color Labs, a photo-sharing app that raised $41 million in funding but quickly ran out of cash and had to shut down. The company tried to grow too quickly and spent lavishly on marketing and expansion without a solid plan for profitability.
Understand The Legalities Beforehand
Since startups operate in a market that is yet to mature, the legal landscape is also constantly shifting. This can create a lot of uncertainty and gray areas for startups, which others can exploit.
Understand the risks and legalities involved in your industry before starting your business. This will help you avoid getting caught off guard by any sudden changes or challenges down the road.
Not just legalities, focus on tariffs, regulations, environmental standards, and other compliance-related issues that could impact your business.
Coolest Cooler is the perfect example of a successful startup getting bogged down by increased tariffs. The company raised over $13 million on Kickstarter to fund the development of a cooler with a built-in blender, music player, and other features.
The project was widely publicised and highly anticipated. However, when the company tried to bring the product to market, they were hit with a 25% tariff on Chinese-made blenders, which increased the cost of each cooler substantially. This put a serious strain on the business, and they eventually had to declare bankruptcy.
Focus On Timings
An untimed product release is often a recipe for disaster. You need to keep two things in mind before getting the product to the market:
- Is the product ready?
- Is the market ready for the product?
Both the scenarios have to be given equal importance while making a decision. Failure to do so can result in massive losses and bankruptcy, as was the case with Vreal.
Vreal was a social platform that allowed users to create, explore, and share virtual reality content. It raised $11.6 million in seed funding and $2 million in a bridge round from big-name investors like Intel Capital and Acecap.
However, the startup failed just a few years after it was founded. The main reason for its failure was that it jumped into the market too early without considering whether people were actually ready for virtual reality content.
Go On, Tell Us What You Think!
Did we miss something? Come on! Tell us what you think of this article on the lessons from failed startups in the comment section.
A startup consultant, digital marketer, traveller, and philomath. Aashish has worked with over 20 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.
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Author: Aashish Pahwa