MVP
Understanding why startups fail can be as crucial as knowing how to succeed. While there are numerous factors at play, here you will find some of the most common reasons
In our previous article, we discussed how to become a unicorn and whether it’s even possible these days. If you want to find out, click here: https://www.muchmore.pl/en/blog/how-to-do-right-unicorn-startup-1
Now, we turn the tables a bit and want to talk about why startups fail and not succeed.
It’s even scarier now, watch out. According to the latest data, up to 90% of startups fail. Across almost all industries, the average failure rate for year one is 10%. However, in years two through five, a staggering 70% of new businesses will fail.
Why Do Startups Fail?
Understanding why startups fail can be as crucial as knowing how to succeed. While there are numerous factors at play, here are some of the most common reasons:
Lack of Market Need
One of the most fundamental reasons startups fail is that there is no market need for their product. According to a report by CB Insights, 42% of startups fail because they address a problem that doesn’t exist.
For example, Juicero, a startup that created a $400 juicing machine, failed because consumers found the product unnecessary. The machine, which squeezed juice packs, was overshadowed by the simple fact that squeezing the packs by hand was equally effective and free of cost.
Insufficient Funding
Financial resources are the lifeblood of any startup. Without adequate funding, startups struggle to develop their products, market them, and grow their business. Startups often face challenges in securing enough capital, which is why 29% of failed startups cite running out of cash as a critical factor in their demise.
A classic example is the social media platform Vine, which ran out of funding and couldn’t sustain its business model despite its initial popularity.
Poor Team Dynamics
A startup's success is heavily reliant on its team. Poor leadership, lack of experience, and internal conflicts can lead to a startup's downfall. Research shows that 23% of startups fail due to having the wrong team.
For instance, the startup Quirky, which aimed to bring innovative products to market, struggled due to internal team issues and ultimately filed for bankruptcy despite raising over $185 million.
Strong Competition
Many startups enter highly competitive markets without a clear differentiator. Competing against established companies with greater resources and market presence can be daunting. Around 19% of startups fail because they get outcompeted.
The case of Beepi, a peer-to-peer car marketplace, illustrates this challenge. Despite raising significant funds, Beepi couldn’t compete with larger, established competitors like Carvana and eventually shut down.
Pricing and Cost Issues
Pricing a product correctly is crucial for a startup's success. Overpricing or underpricing can both be detrimental. Additionally, high operational costs can eat into profits. About 18% of startups fail due to pricing or cost issues.
The case of Homejoy, a home cleaning service, is an example where high customer acquisition costs and pricing challenges led to the company's downfall.
Shifting Focus: From MVP to MVE
In the current startup ecosystem, the concept of a Minimum Viable Product (MVP) has been pivotal. However, there’s a growing shift towards the Minimum Viable Experience (MVE). The MVP focuses on building the bare minimum to validate a product idea, whereas MVE emphasizes delivering a holistic and satisfactory user experience even in the initial stages.
This shift underscores the importance of customer satisfaction and retention from the outset. A product that merely functions is no longer sufficient; it must also provide a seamless and enjoyable experience to stand out in a crowded market. For instance, consider how Dropbox succeeded by not just offering cloud storage but by ensuring a seamless user experience with easy file synchronization and sharing features.
Realistic Examples and Case Studies
Case Study: Theranos
Theranos, once valued at $9 billion, is a cautionary tale of a startup that failed spectacularly due to multiple factors, including overpromising and underdelivering on technology. The company claimed to revolutionize blood testing but failed to produce a viable product, leading to its collapse and criminal charges against its founder.
Case Study: Pebble
Pebble, one of the early pioneers in the smartwatch industry, raised over $40 million through crowdfunding. Despite its early success and strong community support, Pebble failed due to financial mismanagement and intense competition from tech giants like Apple and Samsung, ultimately leading to its acquisition and shutdown.
Adaptability and Learning from Failure
Successful startups often share a common trait: adaptability. They are willing to pivot and change their business models in response to market feedback and changing circumstances. Slack, for example, started as a gaming company before pivoting to become the widely successful business communication platform it is today.
Learning from failure is a critical component of long-term success. Startups that analyze their failures and adapt their strategies accordingly can turn initial setbacks into valuable lessons. For instance, Instagram began as a location-based check-in app called Burbn before pivoting to focus on photo sharing, which led to its massive success.
Conclusion
The high failure rate of startups can be daunting, but understanding the common pitfalls can help entrepreneurs navigate the challenges more effectively. By ensuring there is a market need, securing sufficient funding, building a strong team, staying competitive, and focusing on delivering an exceptional customer experience from the start, startups can improve their chances of success.
In a world where up to 90% of startups fail, embracing adaptability and continuous learning can make the difference between failure and becoming the next unicorn.
Startups must focus on creating a Minimum Viable Experience (MVE) to ensure they not only meet but exceed customer expectations, setting a solid foundation for long-term growth and success.