The Curious Case Of Startups: How to Spot the Failures and Successes

Business.com / Starting a Business / Last Modified: February 22, 2017

Hot new startups emerge daily—yet many of them turn cold quickly. So what is the formula for success? We break it down.

Startup success rates have been the subject of quite a few studies, even more so in the past decade, since technologies have enabled the concept of global marketplace. 

Surprisingly, most estimates suggest that startup success rates hover at anything between a mediocre 15 percent in certain niche industries, to a dismal 8 percent in fiercely competitive markets such as tech-inspired businesses. 

A study by Startup Genome hardly minced words, and pegs the startup failure rate at a lofty 90 percent.

Related Article: The Value of a Degree: Why Silicon Valley Startups Need More MBAs

Premature scaling, that is, the mistake of chasing growth without the foundation to handle the scaling up, is a pitfall that most of the dysfunctional startups fail to maneuver past. To put things into perspective, let’s see whether there are any substantial differences in the startup success rates across major countries that are witnessing startup activity.

Data revealed by the US Department of Census indicates that ever since 2008, the number of business deaths have outpaced new businesses by at least 70,000. That’s a major trend reversal, considering that annual numbers of newly founded businesses were outnumbering failed businesses by 10,000 till 2008. 

India is the hotbed of startup activity, along with China. However, the numbers are not too flattering, with more than 80 percent Indian startups failing to see the light past their 3rd year of existence.

China has witnessed tremendous growth in the number of startups sprouting up every year. However, success continues to elude most of them, with market studies estimating success rates at a meager 10 percent.

Australia, however, has had better numbers to report, with an Australian Bureau of Statistics, reporting that almost 50 percent (47.5 percent, to be precise) of startups that were founded in 2009 were still in existence in 2012-13 financial year. Of course, mere ‘existence’ is not a measure of success, so the big question remains – why do startups fail so often? 

Four Reasons Why So Many Startups Fail to Fire 

1. The Market Doesn't Need the Product 

Unless the entrepreneurs behind the startup are real masters of creating needs, their products actually need to address real, complex, critical user problems. Ideas that don't solve real problems, become a problem themselves, for the entrepreneurs.

2. They Forget That 'Cash Is King' 

It's surprising how several startups continue to repeat the mistakes of those that have shot themselves in the feet by losing plot of cash flow. Whether it's the startup's failure to dissolve equity for funding, uncontrollably high burn rate, or failure to properly time the fund raising exercise, cash flow mismanagement often spells doomsday.

3. Big Strategic Voids 

There's this famous cartoon, with aged scientists filling the blackboard with complex equations, and an assumption written in the middle of the 'plan'. The assumption says - 'then a miracle occurs'. Startups often fail to work out strategic alternatives to critical business enablers such as availability of affordable quality raw material, finding the right infrastructure in the market, and what not.

Related Article: Tactical Startup Growth Hacks That Never Stop Working

4. The Force Called Competition 

Startups that come to the markets with their novel ideas, sweat it out to convert the concept into a product, and pour in marketing dollars to gain acceptance in the market, often find their fizz dissipating, because competitor jump in right when the market is ready to buy, without having incurred all the learning costs. Especially in geographies where copyright and trademark laws lack clear definitions and implementation, startups need to be very careful about how they estimate the market size, and plan to stay ahead of competitors.

Let’s not lose the plot here, the 10 percent that do succeed deserve applause, and can certainly be the motivators for others.

Four Attributes of Strong, Successful Startups

1. Vision, Dynamism, and Long Term Planning 

Markets behave crazily, and they do so more often than what many entrepreneurs are able to digest. Inadvertent events such as government inflationary measures, sudden change in consumer consumption patterns, ripples of global economic movements, etc. can drastically change the marketplace a startup is operating in. The solution – long term planning, and the passion to stay put.

2. The Founders

Almost everything about the startup's success is closely associated with the founders, right from their belief in their idea, the business model they devise, the communication skills to engage investors, and their ability build strong, cross functional, and motivated teams. With multiple founding members, it’s critical for the success of the startup that the men involved think objectively, always.

3. The Core Workgroup

Getting the right mix of people to drive the business vehicle forwards, helping the team evolve to the amorphous lines of responsibilities of work in the startup, ensuring that hefty paycheck of fence sitting employees do not consume the working capital of the startup – everything is important in the early stages of a startup. Invariably, the ones that are able to build a strong core team that’s committed to the idea, live to see the light of success.

Related Article: 14 Newsletters Startups Should Subscribe To

4. The Right Balance of Product and Marketing 

So many startups experiment with innovative product and service ideas, and unconventional business models, but a selected few succeed. Why? The reasons can be twofold – either the product or service does not solve the consumer’s need at the price it’s delivered for, or the idea is not driven properly through smart marketing and sales campaigns.

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