Identify and keep away from the main problems that can sink your business

Startups are characterised by their innovative approach and exponential growth potential. Today, they are a crucial part of today’s entrepreneurial ecosystem. In fact, according to a report by El Referente, during 2022 there were more than 4,300 startups in Spain, of which 1,310 were in Catalonia, where 70 new ones were born in the same year. However, the road to success or even stability is not always easy, and many of them end up failing in the attempt. Nearly 20% of the companies that are set up in Spain do not survive even one year, while of those that manage to survive, only 45% are still in business five years after their birth, as explained in El Mundo.

What are the reasons behind these failures and how can they be avoided? Of course, every company is unique and can face specific challenges. However, there are problems that any startup must combat at some point. Therefore, in this article we will name and elaborate on some of the most common reasons that can lead to business failure.

Lack of market demand

One of the main reasons why startups fail is the absence of a Product-Market Fit. Without a clear understanding of customer needs and wants, it becomes virtually impossible to create a product or service that is aligned with the target audience. As Marc Andreessen, US entrepreneur, venture capitalist and software engineer, pointed out in 2007 in the following blog post: “You can always sense when the Product-Market Fit (PMF) is not happening. Customers aren’t getting value from the product, word of mouth isn’t spreading, usage isn’t growing as fast, press reviews are a bit ‘blah’, sales cycles take too long and many deals never close.” To stop this from happening, Eric Ries, author of the book The Lean Startup, emphasises the importance of building a minimum viable product (MVP) and getting early feedback from users to adjust the company’s approach. This work fundamentally explains the importance of MVP, iteration and PMF. Ries draws on real-life examples from his own experience, as well as reviewing case studies of other start-ups. Without real market demand and proper guidance, the startup will always be close to falling.

Team problems

Team strength and cohesion is essential to overcome any situation. It is crucial to hire the right people with complementary skill sets and a shared vision. As Reid Hoffman, co-founder of LinkedIn, said, “no matter how brilliant your mind or your strategy, if you play alone, you will always lose to a team”. However, building a team based on technical expertise alone, without regard for cultural fit and shared values, can lead to internal conflict and hinder progress. A strong working group is necessary for the consolidation of any business. Andreessen himself points out that one of the main reasons why startups fail is the lack of a team capable of executing the company’s vision. Inexperience in business management and the inability to adapt to changes or the existence of internal conflicts can weaken the structure of the company.

Insufficient capital and poor financial management

This is another critical factor that can lead to failure. Without an adequate amount of seed capital and a sound funding strategy, the company may run out of funds before it breaks even or earns enough revenue to sustain itself. Investor and entrepreneur Steve Blank advises startups to seek diverse funding sources and consider scalable business models to ensure a healthy financial position. You can find all the advice and references from the experienced entrepreneur at this link. The right funding is essential to sustain operations, drive growth and overcome unforeseen challenges. According to CB Insights, a venture capital database, running out of cash is the second most common reason for early-stage failure. Skynova, which makes invoicing software for small businesses, surveyed startup founders in November 2022 and analysed data from CB Insights to conduct a new study of why startups fail. As entrepreneur and author Guy Kawasaki advises in his book The Art of the Start 2.0, “entrepreneurs must focus on getting started, controlling costs, and seeking capital from the right sources at the right time”. These lessons are even more important today, when investors are looking for profitable businesses with validated business models. Here is an article about what you need to be investable.

Fierce competition and lack of differentiation

In many sectors, startups face fierce competition from other established companies and emerging new entrants. Difficulty in standing out in a saturated market, limited perceived value, struggling for low prices, lack of customer loyalty and lack of innovation can lead to closure. To succeed, it is essential to differentiate and stand out from the crowd. Peter Thiel, co-founder of PayPal, in his book Zero to One, stresses the value of radical innovation and the creation of unique products or services that meet unmet needs. Without a clear and differentiated value proposition, startups can lose relevance. He argues that competition is often fierce in established markets, making it difficult for new entrants to gain a foothold. Thiel suggests that startups should aim to create a unique product or service, rather than compete with existing ones and thus establish a monopoly-like position. Moreover, excessive competition can lead startups to copy their adversaries instead of looking for new ideas and solutions, leading to zero-sum markets.

Inadequate planning and execution

Poor planning and execution are two critical factors that can be devastating. As Peter Drucker, renowned management consultant and author, said, “unless a commitment is made, there are only promises and hopes, but no plans”. Without a thoughtful path, it only leads to a lack of clarity, direction and focus. Apart from having a plan, you have to know how to carry it out. In Eric Ries‘ aforementioned work, the entrepreneur emphasises the importance of validating assumptions through experimentation and quick understanding. He argues that execution should be driven by a continuous feedback loop, allowing start-ups to iterate and improve on their initial ideas. This is directly related to learning and adaptability. As Reid Hoffman argues, “if you’re not embarrassed by the first version of your product, you’ve launched too late”. In this way, he highlights the importance of learning from initial failures, overcoming, improving and adapting.

Bcombinator’s podcast as a reference for entrepreneurs

To discover the secrets behind the failure and success of a startup, from the experts, listen to the episode “Why startups fail”, of the podcast directed by and for Bcombinator entrepreneurs, in which relevant topics are discussed with leading figures in the ecosystem.

This time, Sergi Vila, CEO of Bcombinator, interviews Erik Brieva, President of Bcombinator, who is a successful entrepreneur (he has created and sold 4 startups) and investor (he has invested in more than 30 businesses), and they share their experience and knowledge about the reasons behind business failures.

Watch the podcast on YouTube: https://www.youtube.com/watch?v=BV5OJP5iftI

Listen to the podcast on Spotify: https://open.spotify.com/episode/1Kb80Na29RY04g0VqT7sft

Throughout the conversation, Erik Brieva discusses the main obstacles startups face and unravels the causes of a potential downfall. Fortunately, he also provides practical tips and smart solutions to overcome these recurring challenges. Always drawing on his extensive and creditable personal experience, he offers inspiring insights on how to learn and grow in these times.

Without a doubt, this is an essential resource for entrepreneurs, investors and anyone interested in the world of startups. Don’t miss it and enjoy it on your favourite platform!