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STARTUP

42 Percent of Startups that Fail Trip Over This One Critical (Avoidable) Point But 4 Steps Can Save You

Avoid disaster by doing your homework.

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BY Erik Sherman - 11 Jul 2018

42 Percent of Startups that Fail Trip Over This One Critical (Avoidable) Point But 4 Steps Can Save You

PHOTO CREDIT: Getty Images

CB Insights has published some interesting data on failed startups in the past. A report earlier this year offered shocking-yet-not-shocking results from 101 startup post-mortems.

The focus was on tech startups, which is a narrow choice. Yet many of the results, the top reasons startups died, rang true. You can see them in small retail stores, product companies of all sorts that try to catch attention from the public in various ways, or service vendors.

In the CB Insights analysis, of the top 20 reasons startups fail, one stood out. Of all the failures, although they may have had multiple causes, 42 percent mentioned this single issue.

Ones that you'd expect came after: ran out of cash (29 percent), not the right team (23 percent), lost to competition (19 percent).

The most common reason startups failed was that there was no market need.

No matter what they did, it was hopeless. If they sold products, not enough people wanted them. If they offered services, too few signed up. If they tried to run on advertising, the advertisers had no use for them.

This is rejection that makes the experience of middle and high schools look like nothing.

Sometimes you can smell the impending collapse, as with Juicero, which required customers to pay hundreds of dollars for an Internet-connected juicing machine that only worked with subscription-based juice packets that ran $140 to $200 a month. Between $7 and $10 per glass of juice.

And that you could operate with your hands instead of the machine.

I think of an attempted kitchen store in a relatively small town near me. Not enough stock, an odd collection of items, and with better funded and inventoried competitors is more upscale towns within 20 minutes by car. The shop closed within months.

Another future local business: a few people decided to open an ice cream store that will sell only 6 flavors at a time, with most of them being something ... uh ... creative. Forget standbys like vanilla and chocolate. You know, the flavors most often requested. In a tiny space without room to sit.

You probably have seen plenty of examples if you think back.

Granted, some ideas that eventually work out sound silly to start. But that's survivor bias. Many, many more startups with odd strategies die off early on or are sustained by some money from investors who are worried about losing their initial investments.

We've all had the experience of seeing some business start and mentally given it six months or a year before it went under. Because, it was just so obvious that the venture wouldn't last.

When you look at your reactions, you'll find they stem from the mismatch between what someone offers and what you, as part of the consumer public, would find worth spending money on.

There are multiple factors that can lead to the market having no need for what someone wants to offer:

  • The offering is in a place saturated with competing consumer choices that are well established.
  • It's a niche play without access to enough customers (whether at a physical location or online) to support the business so that the small percentage that might be interested can spend enough to keep you solvent.
  • You have no significant and appreciative market differentiation.
  • Product selection and prices aren't a match for the demographic.
  • You don't accurately know who your customers are.
  • There was no research into what people wanted.
  • Customer service is unpleasant.

You could come up with lists of many other reasons why a business had nothing the market wanted.

Although you can't guarantee success in a market, there are four steps you can take to minimize the chance that your business won't be of interest to anyone.

First, do basic research. Get a sense of what people want and what the competition is. But recognize that the answers you get won't necessarily predict what your potential customers will do in reality. Back in 1997, how many people would have said they'd spend hundreds of dollars for a phone that had a touch screen?

Next, recognize that quality actually does matter. The more you try to cut corners, the less reason you'll have for customers to stick with you.

Third, it's not just the product or service that people want, it's the experience from consideration through purchase to handling problems. It's difficult to overcome someone's unpleasant experience even with product or service quality. If you don't have a competitor to provide an alternative, you soon will.

Fourth, monitor the business and customer attitudes constantly. The sooner you know about a shortcoming, the faster you can address it and save your business.

All through the process, you also have to be honest with yourself and allow others to give you their opinions as well. Entrepreneurs can fall in love with their concepts and assume that things will always work out. For most ventures, they don't. Better to be critical and change course early on than to sink a lot of time and money into something that doesn't have a chance.

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