Why Do Most Tech Startups Fail? – Everything You Need to Know

According to Wikipedia, a startup is a company or a business, or an entrepreneurial venture designed to meet the market’s needs by creating a viable business model around a product, platform, process, and service.

A startup typically aims to create and validate a business model that is scalable effectively. Startups, generally recently established, are in the research and developmental phase for potential markets. The term gained international popularity in the dot com bubble, during which many dot companies developed.

This fact has many terming startups as tech companies, but with the advent of technology, startups associates with innovativeness, growth, and scalability.

Startups witness high rates of failure; the minority percentage that succeeds includes those that have become large and influential. 90% of tech startups may fail.

why most tech startups fail
why most tech startups fail

A tech startup is a company aiming to introduce and bring technology products and services to the market.

These companies often try to solve a market problem whose solution is not apparent and is not success guaranteed. Steve Blank, the author of the book “The STartup – Owner’s manual,” defines a startup as an organization formed to search for a repeatable and scalable business model.”

Types of Tech Startups

Here are the types of tech startups.

1. Consumer Software Startup

A consumer software startup is a company that delivers products and services to consumers through software (programs) operated on computers, mobile phones, and other electronic devices. Consumer software companies include Facebook, Twitter, Instacart, and Snapchat.

2. Consumer Hardware Startup

A consumer software startup is a company that aims at delivering products and services to households and individuals via physical, electronic devices.

Some of these startups also create their software to enhance their consumer’s product experience. Consumer Hardware Startups include Fitbit, Boosted Boards, GoPro, and Apple.

Check out, What should startup know before seeking funding?

3. Enterprise Software Startup

An enterprise software setup is a technology company that focuses on providing products and services to business organizations through computer and mobile devices-operated software or programs.

This startup type serves range from sole operators, small and medium business organizations to big multinational enterprise customers.

Some enterprise software companies also sell enterprise hardware and consumer software; the famous Oracle company provides enterprise software and hardware.

Microsoft company sells software to individuals and enterprises. Enterprise software companies include Slack, SAP, and Salesforce.

4. Enterprise Hardware Startup

An enterprise hardware startup focuses on providing products and services to business companies through physical, electronic devices.

The business companies can include individual operators, medium and small business organizations, and large multinational enterprises.

Enterprise hardware business organizations can also sell enterprise software such as Oracle; enterprise hardware startups include Siemens, Dell, Cisco, and IBM.

Many tech industry experts have accepted that failure precedes success in the tech startup sector.

With the 10% success possibility in the industry, many companies set up now will be non-existent in the next five years, according to Ritoban Chakrabarti, Director & CEO, MarkAce Marketing Pvt. Ltd.

It is therefore essential to identify and understand the reasons why many tech startups fail.

Also, check out, Why do people leave big tech companies for startups?

Reasons Startups Fail

Many tech entrepreneurs consider funding as the only way of gaining startup success; however, tech company founders have failed even after injecting vast amounts of money into their businesses.

Tech companies need to look beyond funding and focus on how it pays off. Here are some of the top reasons why 90% of Startups fail:

Reasons why most tech startups fail
Reasons why most tech startups fail

1# Running out of funds

A startup can kickoff well with enough capital, spend less on essentials, but if the company lacks a future funding plan, the chances are that it is most likely to fail.

Lack of funds usually does not pose a significant problem during the early stages of the business unless the company requires to acquire an MVP.

A startup’s success largely depends on its ability to manage customer acquisition costs, avoid unnecessary hiring practices, avoid unnecessary product or service improvements, among others.

Startup founders who master these tips achieve success in their businesses. According to Jason Fried, co-founder at Basecamp, raising money teaches one bad habit from the enterprise; an individual with money at the bank gets good at spending it.

It is for this reason that many investors prefer profitability to growth. However, startups that employ a “spend to win” technique fail fast.

Startups mainly operate on a month-to-month basis, on burn rates (how much money the startup spends every month) and the expenses of the company’s growth as it progresses.

Thus, startups require to generate profits from their inception; profits attract potential investors, which cushions the company’s scale-up.

A startup can improve its burn rates by spending on essential services, calculating the optimal burn rate using the rule of the thumb, hiring moderately, employing remote teams, focusing on equity and not cash on the payroll, calculating the runway, optimizing working capital, and avoiding the PR myth.

Therefore, startup founders can achieve success by effectively developing an effective financial plan for expenses and revenue and managing daily company operations. The knowledge of the company’s expenditure aids the company in fundraising or sourcing funds before they run out.

Check out, How to Hire Developers for a Startup Without Funding

2# Poor Timing for the Product

Bad timing is a popular reason for startup failures; Myspace and Friendster are such examples of the same. Lousy timing for enterprises means either the startup began too early or too late for the market.

It can be challenging to identify the most accurate timing to launch a startup. A startup might consider the following variables:

  • Existence of enabling technologies
  • Optimal economic conditions
  • Trends
  • Cultural Acceptance

Z.com founded just before the dot com bubble, is an entertainment company that shut down in 2003 due to bad timing. The enterprise had a similar idea as YouTube attracting venture capital funding and Hollywood talent on board.

Z.com came at a time when computers had not popularized access to videos and low broadband penetration. 2004 was when Adobe introduced Flash for video viewing, there was fast internet, and computers were faster. YouTube launched around this time and has witnessed success to date.

Companies that came too early include:

  • Webvan: today’s Conershop/Instacart
  • Pets.com: today’s Petflow.com
  • Letsbuyit.com: today’s Groupon
  • Beenz.com: today’s Cryptocurrencies
  • Justin.tv: today’s Periscope
  • Market Fit

42% of tech startups sink due to bad product-market fit, according to CB Insights. A startup that puts out a product or service before establishing the market is looking at its pitfall.

According to Steve Jobs, people do not know what they want until they see it; while every startup founder hopes that their product or service will become successful as Apple, the reality is different; not every product takes over the world after launch.

Tech startups fail to achieve product-market fit because of these mistakes:

  • Confusing Value Propositions
  • Ineffective Data Analysis due to flawed assumptions
  • Miscalculations of the market share

According to Andy Rachleff, CEO and co-founder at Wealthfront, a startup can always tell when there is a product-market misfit from the following signs:

  • Customers overlook the value of the product.
  • The slow growth of the product or service’s usage
  • Lack of word of mouth spreading of the product or service
  • Low press reviews
  • Long sales cycles
  • Deals do not close

A tech startup can achieve a market fit for its product or service by providing exceptional customer experience and testing its assumptions with the customers.

MailChimp is a software company that uses the customer experience tactic; the tech company began operating in 2001 and has gained 15 million customers from optimizing their customer experience.

For this reason, the tech startup has never accepted venture capital funds; it employs customer feedback and regular testing to maintain its success.

Also, check out, What Tech Startups Look for In Employees

3# Hiring the Wrong Team

A great product or service is likely to flop if the startup does not hire the right people. A wrong or weak team can give up easily, offer poor leadership, or the company can witness co-founder conflicts.

A tech startup needs to hire a flawless team that will execute duties effectively and efficiently, be passionate, possess an entrepreneurial spirit, identify with the organization’s culture, and emphasizes the company’s growth through results.

Instagram app bought Facebook in 2013 for $1 billion with only 13 employees.

Hiring the wrong person costs your company; the company has to spend money and time training new employees, more funds on looking for a replacement to the wrong hire, and the most detrimental; employee disengagement.

An instance of disengagement is hiring the wrong leader for the company’s employees, and the result is losing key functional employees, a high price to pay for one wrong person.

Tech startups famous for attracting top talent (software developers, designers, and tech startup veterans globally) in the tech world include AngelList, GitHub, and Unicorn Hunt. With the right teams, tech startups achieve qualified candidates, consequently achieving company growth.

Strong management and leadership emphasize the success of a tech start-up. Leaders who showcase weakness, lack confidence, and conflicts attract chaos from the employees; withstanding these issues lead to the startup’s success.

Also, check out, How do tech startups raise money?

reasons most tech startups fail
reasons most tech startups fail

4# Competition

Competition between tech enterprises is healthy but is also responsible for the downfall of several companies. Because of this, tech startups aim to address the unique needs, wants, and demands of their specific customers.

The tech world requires companies to be very innovative; the more innovative companies outpace their formers.

To meet the needs of the ever-changing tech ground and beat completion, tech startups can:

  • Assess trends
  • Gather data from consumer experience management avenues
  • Real-time validation of assumptions

For a tech startup to remain relevant amongst competitors, it is essential to gather customer or consumer insights often and use them to strategize rather than doing what their competitor is doing.

A transparent company vision is a competitive advantage that ensures you maintain your consumers; consumers make your startup successful at the end of the day.

Also, check out, How much do startups spend on marketing

5# Poor Marketing

Even bad products with exceptional marketing sell, a good product or service cannot sell itself. A tech startup must set aside a budget for marketing, with specific goals and a clear strategy for the implementation.

The tech startup is selling the product to gain profits and attract VCs funding and inside motivation for the employees.

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Tech startups require strong creative and marketing teams to sell the product and maintain the company in the competitive market. Every tech startup is bound to witness failure at some point; the best way to recover from it is acceptance, analysis of the mistakes, and conquering new business horizons.