Having a great idea and turning it into a successful startup is exciting if you do it correctly. But the failure rate of startups in the tech industry is an astounding 70-80%. This should give pause to any entrepreneur considering launching a startup.
The reasons for a startup failing are many and varied. But the top five reasons accounting for most of this failure rate stand out as being completely avoidable.
Every company experiences growing pains. The road from a great idea to a marketable product is long and bumpy. By being prepared and knowing where you're likely to encounter difficulties, you can overcome the bumps along the road to profitability.
We'll look at the top five reasons for failure in the startup tech industry. Hopefully, by being aware of the pitfalls, you'll be better prepared to make wise choices and avoid the stigma of failure.
The number one reason for failure in the tech industry is because entrepreneurs misjudge the size of the market for their idea. Once you've hit on that perfect idea, the second thing you should do is determine whether or not it's actually marketable.
Just because you design a slick app that feeds your cat when you're not home, doesn't mean enough cat-lovers will buy it to make your company profitable.
You need to perform market research and determine whether the size of the existing market will support your company. It takes money to develop your idea into a solid product. If the market is not there, you may launch your product to great fanfare, only to see your company go bankrupt later on. You need to run market projections to determine your money needs. Be willing to accept the figures if they tell you that your idea won't make money over the long run.
The need to keep a tight rein on your finances early on in your company's development phase should be a no-brainer. But expenses have a way of growing to the point they become uncontrollable.
Be smart in the way you calculate the amount of money necessary to develop your idea into a marketable product. Don't splurge on anything just because your product is doing well initially.
If you've received a windfall investment, don't suddenly think you can loosen the reins of frugality. Keep your expenses as lean as possible until your product has been on the market for at least a year or more. Spend as little as possible until you have a steady income and a comfortable market share.
This will give you the ability to make a rational judgement of whether you can afford to expand or not. Companies that expand too rapidly when they start to enjoy increased sales are companies that are not pragmatic with their available funds. These companies often fail when, with a little foresight, they could have been successful.
This may seem obvious on the surface. But most entrepreneurs start their companies with the help of supporters, colleagues, and friends they know on a personal level.
As the leader of your company, you have to be prepared to make difficult decisions. Those decisions may include losing a friend to ensure the health and profitability of your business.
Consider whether the team you have in place currently is the right team to serve the company down the road. Your original team will expect to be promoted and assume greater authority as the company expands and becomes profitable. But you have a responsibility to all your employees as well as your investors.
Be ready to make the hard choice of whether your current team has leadership potential or whether they were just in the right place at the right time.
Even if you create a product that no one has ever seen before and you create the market for it, you'll soon have competition. You should never rest when you're on top. There's always a better product just around the corner that is coming for your market share.
Product development should be a never-ending facet of a successful company. It can be an expensive facet, but that's why you've kept a tight rein on your cash.
The need to suddenly spend money on upgrading your product line should never be far from your mind. You should plan for this eventuality and earmark funds for it as a normal part of your budgeting exercises.
Pricing is one of the most difficult aspects of a business to get correctly. It doesn't help when you're competing against a crowded field of other companies. There is rarely a company that gets pricing exactly right when they first launch their product.
Because of variable factors in the marketplace, you may have to change your pricing to account for these changing conditions. But never lose track of what you need to charge to keep your company financially healthy.
The need to expand and develop new products should always be considered in determining pricing. You should set your pricing to allow for future expenses.
Hopefully, you'll take note of these reasons for the high percentages of startup failures and be wise enough to avoid all of them. But failure can come from any direction. You can never let down your guard and become complacent.
You can learn from the mistakes of others. But you also can keep a close watch on the marketplace and realise when a condition is developing that will threaten the health of your company. Remaining vigilant and resourceful when market conditions are not favourable is the mark of a successful entrepreneur.