Most Common Reasons Startups Go Bankrupt

December 3rd, 2015 | by Mike W
Most Common Reasons Startups Go Bankrupt

There are quite a few people out there who believe that the easiest thing in the world is to found a startup and watch millions pour in. Simple common sense will tell you that this is just not the case in reality. If it were, then we would all have super-successful startups, making us billions. In the real world, anywhere between 75% and 90% of startups fail. The reason for such a dramatic percentage is that there are plenty of things that startups can do wrong and they often do.

But what are the most common reasons for startups failing and going bankrupt?

Wrong Timing

In order for a startup to succeed, the timing has to be absolutely perfect. If you start too soon, you risk the market not being ready for the product. It may be the best product or service in the world, but if the potential customers are not ready for it yet, it will not succeed. It is equally as dangerous to start too late. In such cases, the market will already be saturated with other people offering the same thing you do. They will have the upper hand and you won’t be able to compete with them.

Poor Business Model

A good business model is the cornerstone of every successful business, startups included. Startups usually begin with a great idea about a product or a service that people will want. Unfortunately, this is not enough. You need to know how to market the product and how to attract customers. Moreover, the cost of attracting customers (also known as CAC for short) has to be lower than the amount of money you will earn from them (lifetime value of the customer, or LTV for short). If you do not have this worked out, the quality of the product will not matter.

Running out of Cash

It would be a great thing if the world worked differently, but unfortunately, in order for a business to survive and grow, it needs money. Startups usually start with some kind of seed money, but sooner or later, this money begins to run out. The problem arises when the income is not great enough or when the startup’s value does not inspire new investors. All of a sudden, the startup has no money to fall back on and it’s game over.

Poor Management

Like we have already mentioned, the quality of the product or the service is not everything. A startup needs efficient and knowledgeable management or it is doomed to fail. People who run it need to know how to achieve results, how to manage people, how to plan for the future and how to adapt to ever-changing parameters of running a business. Often times, startup owners and managers forget to look for business advice and improve their skills. This very often causes the startups to fail and go bankrupt.

Ignoring Customer Feedback

Once a startup builds a certain customer base, it is possible to learn a lot from them and use this new insight to improve the way the startup works. Unfortunately, startup owners and managers are often blind and deaf when it comes to this, relying solely on their vision and their plans for the future. This is one of the biggest mistakes that they can make. It is your customers who will determine whether your startup lives or dies and ignoring their feedback is like signing your own death sentence.

Inferior Quality of the Product (Service)

The final reason for startup failure that we will cover is perhaps the most tragic and sad one. Namely, there have been quite a few cases when it turned out that the service or the product that the startup was so proud of was not really that great. It may have been less superb from the very start or maybe it had to do with the actual process of turning it into reality. It does not matter. Some startups simply come out with products/services that are just not as good as they thought they were.