Why do startups fail?

Published - November 06, 2017 05:30 pm IST

 Flawed market research has claimed many a victim in the startup world

Flawed market research has claimed many a victim in the startup world

CB Insights, a New-York-based company that does a lot of research on the startup scene globally, had an interesting analysis recently about the top reasons why startups fail. A lot of predictable reasons were listen in the top 10 causes, such as “ran out of cash”, “not the right team”, “pricing issues”, “poor product”, “bad business model”, “poor marketing.” Right on top, with a whopping 42% of the failed startups analysed suffering from it, was “no market need”.

This begs the question: if there was no market need, why was there a startup catering to it in the first place? One likely answer is in the nature of entrepreneurs. These are people who are constantly coming up with ideas. Which is a great thing. But a lot of entrepreneurs also tend to be so enamoured of their ideas and are so confident in their success, that they start their businesses before actually analysing if there is a large enough market for the product or solution that they are peddling. So clearly, unless you want to predestine your startup for failure, it makes a lot of sense to analyse your target customers deep enough and make sure that you are solving a problem or a pain point that they actually have, and not something that you imagined or guessed them to have — however great the idea might sound in your head.

However, a lot of these startups that failed because there was “no market need” also got truckloads of funding from venture capitalists. Some of the biggest failures have also been some of the best funded ones. So what happened there? How is it that venture capitalists agreed to part with their money for products or solutions that were not actually solving any tangible real world problem? This is where I think the personality-driven heuristics of venture capitalists fail them. Just because a team of entrepreneurs who have succeeded previously are starting something new, they do not bring with them any guarantee that the new ventures will succeed too.

Also, most such entrepreneurs who have succeeded previously, either in their ventures or just in raising funds from VCs, tend to be excellent at selling their idea. This is not because they are out to con anyone, but the gift of being natural at selling, combined with their belief in how awesome their idea is, makes it a very potent combination that may make their startups hard to resist for many VCs. And the VCs start buying into the idea just as hard, and fund it. Sometimes they have bought into the idea so much that even after enough early indication that it might not have legs in the market, instead of cutting their losses, they pour even more funds into it. And here is the thing about companies that are catering to no real market need: it does not matter how much money you pour into such a company; it is ultimately doomed to fail.

In this weekly column, we discuss the startup workplace. The writer heads product and technology for an online building materials marketplace

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