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The Top Reason Why Startups Fail & How to Prevent It

the top reason startups fail and how to prevent it based on the cb insights post-mortem study on startup failure

There so many reasons for startup failure.  However, this post digs deep into the top reason for startup failure & how to prevent it because it’s also the most important thing you want to prevent.

What’s the top reason?

According to a study of 178 post-mortem startups by CB Insights (updated as of 11/2016), the top reason for startup failure is that there’s no market need for their product.  

42% of respondents in the post-mortem study listed “no market need” as the top reason for their startup’s failure.  

Obviously, if you want to build a startup, you want to prevent yourself from making a product that the market doesn’t want.

With this article, you’ll be better equipped to validate or invalidate your idea or product and either prove or disprove its worthiness in the market.

One of the failed startups from the CB Insights post-mortem study, Patient Communicator, wrote:

“I realized, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office.”

Another failed startup from the study, named Treehouse Logic, described their post-mortem saying:

“Startups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behavior, great reputation as a thought leader, great expertise, great advisors, etc, but what we didn’t have was technology or business model that solved a pain point in a scalable way.”

You’re better off building only a great idea instead of building an okay idea leading to you ultimately failing and falling flat on your face.  

Why Do So Many Startups Make Bad Products/Services?

  • Founders think their idea is amazing and they don’t “need” to research.  This is arrogance at work.
  • Founders become afraid of what they might find if they research their idea to find that it’s already been successfully implemented.  
  • Individuals can be subconsciously afraid that their idea may not be as good as they thought.  
  • It happens because the product isn’t being properly marketed.  
  • It happens because the product doesn’t fit with what the intended market wants.
  • The founder(s) aren’t experts or even well-versed in the field they’re trying to make their product in

These mentalities and reasons are true for too many first and second-time startup founders to cause startup failure.

A lack of research, vetting, and competitive analysis by founders will likely cause your startups to fail. Don’t ignore the process of validating your product or service.  It will save you time, money, and stress.

However, products or services which are not gaining traction are not always inherently bad.

Sometimes your product or service just needs tweaking and then it will match what your target customers want.  This is called pivoting.

And/or if approach your marketing differently in a way that highlights the benefits that the user will get from the product/service rather than listing the features of it, this can make a huge difference in perception of your target audience. 

So, let’s start with understanding what you need to have the best idea and a sustainable startup.

Why You Need Product-Market Fit & How to Get It

target market

The most sustainable and successful startups achieve what’s called product-market fit.

This is when your product or service solves a problem that directly affects your target customers and aligns with their interests.

One attains product-market fit when approximately 40% of your customers will say that say that since they found your product/service, they can’t imagine living or working without your product or service.  

You either created the need for the market or you directly solved a problem in their niche or market, which filled an existing need.

Who is Your Target Market?

You should know who your customers are, why they need your product/service, and if they are going to buy it.

To find out how to build a customer profile and learn who your target customers are, check out this post.

Product-Market Fit is Supported by Data/Feedback Collection  

There are a number of ways to determine if you have product-market fit.

You can collect and analyze data through Google Analytics, Kissmetrics, Heap Analytics, or another analytical program that allows you to constantly measure your data in a large number of categories.  

You can find out if you have product-market fit by collecting user feedback from surveys to identify if your product/service solves their need.

Alternatively, you can individually contact several dozen target users asking them for feedback on your idea. 

You can create a landing page with the description of your idea and claim it’s coming soon and get people to sign up to your email list for updates.  If you had an overwhelmingly good response to this from your target market from your marketing efforts (hundreds of subscribers), then it’s probable that you’ve found a worthy idea.

A similar approach to contacting target users would be to pay for and use feedback and validation services that will give your site its first visitors and feedback on your product/service.

Validation Services

You can further validate your product by testing it with services that will help you with this.  Below are several services that cater towards product validation.  This can go a long way towards preventing you from suffering from startup failure.

Validately

Validately helps you test live websites, mock html, images, or prototypes and analyze the results obtained. You can source testers who match your customer persona and can collect their feedback to uncover usability issues with your product/service.

StartupLift

StartUpLift Beta Testing StartupsThey have a pool of over 60,000 users who have signed up to become beta testers. These users have provided their detailed profile information such as age, gender, income, location, marital status, etc.

After you complete your payment, users matching your target audience will sign up on your website or install your app and perform any additional tasks if requested (and give you feedback). A screenshot of signup completion will be provided as proof.

Betabound

beta testing opportunities for organizationsBetabound is a place for people who want a hand in the next big thing in technology. They collect and organize a wide variety of beta testing opportunities from all over the world and present them in a structured and consistent format. You can test a product or become featured within a specific category.

LaunchSky

launchsky helps startups validate their product ideasLaunchSky is a platform for sharing pitches for apps, so you can validate your idea before you invest time or money into building it. You can comment on any active pitch and subscribe to apps that you would consider using. Pitch your idea to a professional crowd. Get feedback, validation, and early adopters. Help entrepreneurs shape their ideas.

Minimum Viable Product

Not much can take place of a minimum viable product (MVP), though.  

A minimum viable product is basically a barebones version of your startup overall.  It’s the cheapest workaround for your idea without building it out to its entirety.

An MVP is used so you can test the hypothesis of your business objective and value proposition.

However, sometimes you get lucky with your idea and your messaging and your startup is immediately aligned with your target customers and what they need.

Your customers are the ultimate gauge on whether or not your product will be successful in the market. To reiterate, your product needs to fit your customers’ needs.

So, how do you get this product that aligns so well with your customers?

There are a handful of ways, but it’s best to start with the foundation of your startup.  Part of the foundation is the vision which includes your value proposition, unique selling proposition, and company mission. Another part is your market research and competitive analysis.

Startup Fundamentals

Vision for Your Startup

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If you don’t already have a solid company vision, your vision should include your value proposition and unique selling proposition/business objective.

There’s a guy named Paul Graham – you might have heard of him. Paul Graham is one of the co-founders of the first and arguably most successful startup accelerator named Y-Combinator.

Graham says: “the very best startup ideas have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing.  Microsoft, Apple, Yahoo, Google, and Facebook all began this way.”

Founders are supposed to be experts in the field they want to launch a startup in and should be able to identify the gaps in that market.

When you’re developing your concept, you have to ask yourself and answer a handful of important questions. Answering the following questions will help solidify your idea and the framework of your startup, which are crucial.

The first question to ask is: Has this been done before?

You should attempt to answer as many of the questions in the next section before you do your market research.  Then, when you’ve finished answering the questions, start your market research and identify if your hypothesis still has merit based on the market’s saturation.

If you think you’ve figured out a better business strategy after your market research to make a stronger value proposition, then go ahead and update the answers to these questions, and then see how that strategy pans out.

Once you’ve done that, seek out some of these target customers and get feedback.  These individuals could also become chief evangelists of yours if your product fits with their needs enough.

Questions to Ask Yourself

What problem is your startup idea going to solve and why is it needed? (value proposition)

Advice: Don’t make your value proposition about your product, but instead: How you are solving a problem in your target industry/niche?

Why is your idea different than the rest of the industry?

What is your business objective? (In other words, how are you going to make money from it and how is it going to be sustainable?)

Will people buy it?

Who will buy the product(s)/services?

How will you make your product/service?  Can you build it or do you need someone else to?  

What is the cost of getting it made?

Where & how would you sell it?

As far as you know right now, are you relying on external funding (Angel, VC, & Crowdfunding) or are you personally funding the startup?

How much money can you devote towards building your product?

Are you planning on using proven practices or doing whatever you feel like?

Market Research

A good way to prevent making a product with no market need is to start off with doing market research and competitive analyses.

You should be researching on the web whether your product or service has been implemented by someone else already.  This is one of the basic preliminary actions to perform before you build a startup so you don’t succumb to startup failure.

You can go about this by researching keywords and keyword phrases on Google that directly correspond with the product/service you want to offer.

Try to keep a record of every website you visit that is similar or equal to your idea via Google sheets.

While you’re conducting your analyses, write down all competitors’ pricing, product offerings, popularity levels, and how they differentiate from you.

To win a war, you must know thy enemy.  In the startup and business world, you must know who your competitors are in order to be successful.

How are you going to successfully build a multi-million dollar company if you don’t know who your competitors are?

However, focus on your product and your customers more than you focus on your competitors.

For you and your future team’s sake, do an extensive analysis of your idea and your competition.

Set up Google news alerts to notify you when your competitors are mentioned in the press so you can “keep an eye on them.”

Questions You Should Answer Are:  

Has your competitor dominated the market?

Is there an opportunity for you to enter the market and offer something different that adds value for your target customers?

After going through dozens of search terms in Google and writing down all of the players in your market, you should analyze the offerings and differences between the search terms and your idea.

Next Steps

If your idea holds up, then get started on building it, immediately!  And, if applicable, safeguard your idea by filing patents and copyrights.

However, many people that want to launch startups can’t program. If you’re having someone else build it for you, then you should be serving the vendor or manufacturer non-disclosure agreements to protect your idea.

You’re also going to need to write down how your product/service will work including the features and functions of your website.

If you can’t build it, then look for a programmer/developer who might co-found the startup with you. Check out this article: How to Find and Vet Startup Co-Founders to help you find a developer.

 

 

Conclusion

If you plan to start a startup, then do yourself a favor by doing your research and customer discovery.

Before you even start building your product, always make sure you do your competitive analysis, market research, and target-user validation.  

The prospect of a startup is so exciting, but failing with your startup is very depressing.  

Save yourself from the heartache, headache, and empty bank account that you will get from blindly building your startup without determining if it’s something your target market actually wants.

You’re better off spending a month or two on idea validation than spending a year or two building it to find that nobody cares about what you made.

Be smart about your startup idea and don’t fall victim to the #1 reason for startup failure.

Make a product people will want. Better yet, make a product people need.  

This is your career you’re putting on the line, after all.

So, be kind to yourself and do the research!  Your future self will thank you.

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