Nowadays start-ups have become a major career option for people. People, especially, young college graduates find it to be an easy way into earning.
But as easy as it is to venture into the field of entrepreneurship, there is also a great amount of risk of failure of the business. Today’s entrepreneurs have amazing ideas, skills, and teams but still, the business fails.
Below stated are 10 reasons, which are major influencers in deciding the success or failure of the business. If one is able to find one way through these 10 aspects then they are on a way to set up a successful and long-running start-up.
- Industry type
People often enter an industry which they like, rather than the one they can make a profit in.
An example can be that an e-commerce website buys a product from a company for say $ 480, while an established e-commerce site like Amazon sells the same for $410.
There can be various reasons why Amazon is able to put such cheap pricing of its product:
a) The quantity of purchase: A new start-up will usually purchase lesser quantities of a product, while companies such as Amazon would purchase huge quantities of a product because of the demand on the platform.
b) Funds: Amazon has higher funds owing to the period of its existence, diversification in various services, and affiliation income. This allows it to put up competitive pricing.
c) Zero Logistics Cost: Amazon treats the logistics cost as zero. This reduces the total cost of the products and hence, helps in reducing the price of the product.
d) Economies of Scale: The efficiency of Amazon in purchasing, packing, shipping, etc. is excellent. But a start-up spends a lot of money on the same.
Hence, it is difficult to compete in the e-commerce industry against giants such as Amazon and Flipkart because they cannot fight them at lower prices for a long time.
It becomes very important to know about the industry, the existing competitors, and their style of earning revenue before entering into it.
- Faulty Business Model
People think that the particular model type will generate them profit, but on doing the calculations, they find themselves in a loss.
Say, Arjun has a factory, and he finds out that the cost of producing a product will be $100. So he plans to sell the product at $105, hence, making a profit of $5 on each. He does the marketing of the product accordingly and invites people to buy the product at $105. After the actual production of goods, he realizes that the cost of raw material has increased from $13 to $21, hence incurring him a loss. Maybe while calculating the cost of the product, he didn’t calculate the marketing and selling expenses, hence increasing the costs and reducing the profits.
A faulty business model is a very common reason for the failure of a start-up because people often do not invest much time in research and cost analysis.
- Marketing Myopia
People usually assume that the products they are selling are best for the consumers, which is usually not the case. Given so many sellers, it is very easy for a consumer to keep switching to the product he thinks is the best for him.
Let’s see Nokia for example. When the iPhone started gaining popularity in 2007, Nokia didn’t notice the shift of consumer’s taste and kept serving them with the same technology. Gradually people started shifting to iPhone and Android phones because of better features. Nokia was too late in accepting the change and improvising, which led to its downfall.
Entrepreneurs must understand the wants of the consumer, and not focus on what they want to sell.
Detailed research should be done to assess market demand. Products and services should always be kept updating accordingly.
- Weak Feedback System
As discussed above, the growth of any start-up is based on constant improvement. New start-ups fail to realize how important feedbacks are for such improvement.
It is important to keep asking for feedback and work on making the products/services better as per the wants of consumers. It not only helps in the improvement of products but also helps in gaining the trust of the consumer.
If they feel that they are being heard and their needs are being met, then they will choose that company and its products/services.
- No Passion
Starting a start-up just for the sake of earning, without having any interest in the field or the industry is a direct way to its failure.
It is important to have an interest in the field that one is working in. If a person doesn’t have an interest they won’t be able to stay long. They will be easily demotivated when the profits are not good, hence leading to failure of the start-up.
- No Skills
As important as it is to have passion in the field that you are planning to work in, it is equally important that you have the required skills. Most people tend to start a business thinking that they will hire skilled employees to work for them, even when they have no knowledge of the field themselves.
Say, Rohan wants to start a web development company, but have no knowledge of it. He may hire a great team to work below him. If a team member says that a task would require a month, though it can be completed in a week, he will have no idea, hence wasting the time and resources. Rohan, being the face of the company, is accountable if there are any mistakes or delays in the work. This will break the trust of the consumers, hence leading to the failure of the company.
- Wrong Team Selection
Often in start-ups, to spend less on employee salary, entrepreneurs take up friends, family members, or interns. But sadly, in the hope of reducing costs, they end up making a poor team. It is important to create a team with members who complement each other. They need to identify their strengths and weaknesses and hire such people who can cover up their weaknesses.
If an entrepreneur is not good with Finances, then he would hire someone who is. So that the employee handles all the taxes and he can focus on the product and services. This would create expertise in all the areas of work which would lead to a successful start-up.
- Cash Burn Rate
Cash Burn Rate is used to evaluate how quickly a company will run out of capital if its revenues and expenses continue to grow at the present rate.
It helps in identifying how long one can spend the money with no earnings, until they are out of money. This helps in creating a deadline in which they know that they have to generate profits or else should shut down the company.
It is important to estimate the burning rate before venturing into a business so that decisions can be made on raising more capital or not. If Anita has $500,000 and her cash burning rate per month is $100,000, then this means that she has only 5 months before she runs out of funds. So either she has to plan how to start making profits within this time frame or think of raising more capital.
Unfortunately, people think about this aspect only after starting their start-up and hence, fail due to non-judicious utilization of funds.
- Don’t Know How to Raise Funds
After the business is started, and good profits being earned, growth becomes very important in continuing the business. If there is no growth, the business will become stagnant and gradually lead to lower profits and then failure.
Funding is very important to grow at a higher level. Good pitching and marketing skill is very important if you need to raise funds from investors. A good idea and an excellent team won’t do the work unless it is presented properly to the investors.
- Raising Funds in a Very Early Stage
As important it is to raise funds in the business, it is also important to know the right time to raise funds. Usually, people get greedy and raise funds at an early stage, where they have just started making profits. This leads to a decrease in profits left for them since it either gets divided in the interest on equities or payment of debts.
To run a successful start-up, it is very crucial to keep in mind all these pointers and save yourself your precious time, money, and efforts.