9 out of 10 startups fail. Starting your own business is a challenging endeavor, and this is why we explored in detail 10 of the most common obstacles that can make any startup stumble.
Table of Contents:
1. Finding the right cofounders
The right founding team is the first and most important requirement for success in the startup realm. If you’re starting your business solo, you might want to consider finding a partner with whom to share the responsibilities and burden when times get rough.
Many of the biggest startup investors advise finding a co-founder for a good reason. Data shows that teams of two or three founders correlate with significantly higher growth. The reason is simple – a startup is a hard thing to manage, and having more manpower, skills, experience, and different viewpoints is a big benefit. Moreover, your project won’t have a single point of failure, as single-founder startups do.
That said, it’s worth noting that the effects reverse with more than four founders, presumably because of the too many cooks in the kitchen syndrome.
Of course, nobody says finding the right partner(s) would be an easy task. Just as in your personal life, picking the right partner in business is not an easy task. If you need to boil it down to the basics, in order to find the right cofounders you need to look for people that complement your expertise and skills, and for people that share your values and expectations. Starting a business together doesn’t make sense if the above prerequisites aren’t present.
2. Employing the right people
Employees are your most important resource. They could either be your business’ biggest strength or weakest spot. This is why hiring the right people is crucial, especially at the early stages of the company. It is crucial to consider not only the expertise and skills of your first employees but whether they share the same values.
Startup culture is crucial for success, and your early hires would be crucial for setting it. Culture propagates from your founding team onto new hires, which means that it’s very hard to change once it has spread widely. Because of this, in a way, choosing the right first employees is your best chance to build a productive culture in your future enterprise.
3. Finding product-market fit
Probably the toughest nut to crack for any early-stage startup is to validate whether the market needs its product or service. Even if you believe you have a clear vision of the problem you want to solve, you have to go the extra mile and check whether the customers are on the same page.
There are numerous ways to do so. Some of the most efficient include validation tests and direct feedback from customers regarding your solution.
Talking to clients is vital to make pivots and iterations on time. This will get you closer to the often elusive PMF and needs to be a continuous process, especially in the early stages.
4. Finding the right market niche
Sometimes it’s easy to forget that the search for product-market fit has two variables you can play with. The obvious one is the product, but you should not forget that you can change your market as well.
While you are producing your minimum viable product, you should spend the effort to search for your minimum viable segment as well – a group of people who have the same problem and can be reached from the same channels that could benefit from your solution.
Are there any other players who offer similar solutions already, and how established are they? Avoid competing with the big sharks directly right from the start – you’re simply don’t have the resources for a direct confrontation. The winning strategy is to enter a small niche that meets a specific demand and become recognizable there.
5. Bad financial management
Financial management is a crucial part of your business planning and execution. This is true at any point of the company development, but even more so at the early stages.
You have to be very careful how fast you burn your cash. Running out of money before finding your PMF can easily spell doom for your project, even if it holds a lot of promise in the long run.
Get some very basic management accounting skills. Having two sheets to plan your liquidity and to keep track of your P&L is extremely useful to keep track of your project’s finances, but it is also very important when you want to onboard investors and co-founders painlessly.
Another important financial aspect is to be aware of how much money you need, and for what exactly. Make sure to include this in your business plan, especially if you intend to reach out to investors for funding.
Last but certainly not least, having a clear financial picture of your business is crucial for product pricing. How would you know what to charge if you don’t know the direct costs associated with providing the product or service as well as the overheads of your business?
6. Lack of technical expertise
Regardless of whether you are a technical expert or still a junior, it’s only natural to have know-how gaps in some areas. No one can know everything about anything.
This is why jumping on complex technical solutions right from the start is not ideal. Try sticking to simple solutions that meet very specific needs. Complexity is one of the biggest startup killers (more on that below).
Of course, you would also need to be open-minded about gaining new knowledge and skills. As an early-stage startup, you wouldn’t have the resources to pay people for everything you need, so you would need to do some heavy-lifting yourself, even if it’s outside your zone of comfort. That said, you need to be realistic about what you can do yourself, and what needs the involvement of an expert.
If you lack a specific area of expertise and you cannot afford to hire, you can try to draw in a cofounder with the needed background to fill the knowledge and skill gaps in your team.
7. Lack of marketing expertise
When it comes to preparing a marketing strategy for your early-stage startup, sometimes it’s tempting to follow the latest trends in the realm without validating whether they are effective in your business scenario.
It’s smart to create a marketing plan that suits your business model. Find out which are the most effective and low-cost channels to reach your target audience.
Just like we mentioned in the previous point (Technical expertise), if you lack the needed knowledge and skillset, don’t hesitate to outsource to an expert or to find a co-founder with the right skillset.
That said, fully lifting your hands and letting someone else do the marketing of your product is a bad idea for early-stage startups. Even if you are a developer rather than a sales and marketing person, it’s crucial to have direct contact with your (potential) customers, otherwise, you wouldn’t know what exactly your target customers need, and how badly they need it.
8. Premature scaling
A very common trap for early-stage startups is biting off more than they can chew, otherwise known as premature scaling. It is the most common startup failure reason according to the Startup Genome project:
Many founders are tempted to invest too much in their idea too early. Some examples of this behavior:
- Hiring too many employees before your business can support the cost. Firing is legally much more complicated than hiring, so volatile liquidity could sing your business even if you are moving in the right direction.
- Investing too many resources in development before you have validated.
- Investing too many resources in (paid) marketing before you have found PMF or before you have found a sustainable business model (with low enough customer acquisition costs and high enough customer lifetime value).
Achieving rapid growth sounds great, but it’s also tricky. After all, finding the right PMF rarely happens overnight, and a startup can enter its growth stage only after solid PMF has been found.
9. Too much complexity
As mentioned previously, product simplicity is one of your dearest friends, especially at the beginning. It’s not unusual for entrepreneurs and their teams to start over-complicating the solution in the hunt for PMF – it’s natural to want your product to have the perfect feature for each use case. Going down this path to the extreme can lead to you to start developing a new feature for each individual client, which is obviously unsustainable.
Complexity is a problem for many reasons. Given the limited resources of your business, you simply cannot afford to develop and upkeep too complex solutions at this stage.
What’s more, complexity can cause confusion about your mission and strategy. As a result, this can get you even further from the much-wanted PMF, instead of closer to it.
In an ideal world, your product would have a single feature that perfectly serves a homogenous market segment. Of course, this ideal is impossible, but this vision should be the north star that guides you in the early stages.
10. Insufficient business planning
Last but not least, panning is a very complicated topic in the complex and uncertain world of early-stage innovative startups.
First, it’s crucial to keep in mind that planning accurately is very hard, because you never know what problems and opportunities you would face when you are blazing a new trail.
That said, going without much thought is equally bad. To innovate successfully you need to be on the cutting edge of your domain, and you need to plan your resources carefully in order to manage a business venture.
An easily amendable lean canvas for project overview, a go-to-market strategy, and adequate financial planning sheets are arguably the three planning documents that you cannot succeed without.
The challenges faced by startups come under four major groups – people (founders, employees, partners, and their competence), finances, market (problem), and product (solution). The exact challenges you would face are hard to predict, but having a solid foundation and preparation on all these four pillars would ensure that you have the best possible chances to overcome them.