Launching a startup is fairly easy nowadays. They can be launched from home, garage, backyards or shared office with minimal investment or seed money from venture capitalists and crowdfunding platforms, among other sources. Resources including startup incubators and startup accelerators are readily available.
Unfortunately, between 60 percent and 90 percent startups flounder and fail during the first five years of inception, depending upon which source you believe.
There are innumerable reasons why startups collapse, despite being launched by professionals with adequate expertise in any given field, despite availability of highly sophisticated startup ecosystems in various countries, including the US.
Here, we identify various major problems that most startup owners encounter post launch and in following years.
Problem 1: Funds
Paucity of funds is the main problem faced by almost every startup owner. Once launched, a startup requires massive investment to popularize its brand, products and services. This can prove time-consuming since some brands, though excellent, cannot become popular overnight.
Though money will trickle in from the venture’s early days, it would barely suffice for production, sales and marketing payroll, and overhead expenses.
Venture capitalists and crowdfunding platforms are often reluctant to pump more funds into a startup after the seed investment, unless they see immense potential. Remember, they have invested money for profits and not charity. Hence, most startup owners often find themselves cash strapped a few months after launch and almost definitely in the second year.
Problem 2: Copycats
Copycat startups – those launched by copying business and product models of established brands, are destined to run into all sorts of doldrums.
Firstly, they are unable to compete against established companies in the same sector since a new brand takes time to get popular. Secondly, copycat ventures try to attract customers by engaging in price wars. They drop prices hoping to create at least a minor dent in the market slice of a well established direct competitor.
Inadvertently, several startup owners get drawn into the price war trap. By doing so, they compromise the brand image, since it will be viewed as a cheap variant or even an imitation of the established one. Hence, copycat startups can find themselves making little profits that are insufficient to meet operational costs.
Problem 3: Staff
Staffing issues is the third major problem faced by startup owners. Some hire too much while others recruit very less. Both these scenarios can prove fatal to a startup. On one hand, excess staff means longer payroll. Lesser staff means overworked and stressed employees.
A large payroll not only eats into the initial investment of your startup, it continues to denude profits every month in the form of wages and other mandatory benefits you are forced to pay. Fewer, overworked staff leads to high attrition.
This means, your company will need to spend extra resources on fresh recruitment and their training. Hence, it is imperative for every startup owner to make astute assessments for staffing, including part-time and telecommuters before launch.
Problem 4: Insufficient Marketing
Every startup needs vigorous marketing to get popular. However, few have adequate funds to spend on print and electronic media commercials.
Lot of startup owners also wait for their brand to gain some ground in the market before going on social media such as Facebook Business or creating a profile for the company on LinkedIn.
As famous business author, Peter F. Drucker states, every business has two functions – marketing and innovation. Unfortunately, most startup owners consign these to the winds. Few harness the vast potentials of free social media since it requires posting interesting and relevant content often.
Problem 5: Innovation
With further reference to Peter F. Drucker’s comment above, startup owners often fail to innovate rapidly to counter enhancements made to product and service offerings by rival brands or to gain edge over competition. They falsely believe that innovation might force existing clients to move away.
Unless startup owners innovate, they lose whatever small competitive edge they held over others in the same business. Yet, few startup owners make any tangible investments in research and development vital to keep the brand alive and enable it to flourish in the market.
Problem 6: Hedge or Corpus Fund
This is yet another major problem faced by startup owners: they fail to recognize the importance of having a hedge or corpus fund to meet additional expenses required for expansion, product and service enhancement.
Often, a hedge or corpus fund can become the lifeline of a startup. It can help startup owners tide over expenses on expansion of the brand and venturing into fresher markets.
The lack of such corpus fund, formed by setting aside some portion of profits periodically, can adversely impact growth of a startup or even sound its death knell. If external funding is unavailable, a corpus fund is the only source a startup owner can depend upon.
Unfortunately, these are not the only problems faced by startup owners. Another major hurdle they encounter is legitimizing the business. Many startup owners fail to grasp significance of procuring the required licenses and permits from concerned authorities for their startup venture before launch.
Instead, they avail of licensing exemptions that are generally offered for startups everywhere. Not legitimizing a business before launch can render it prone to lawsuits. Also, startups without proper licensing are frowned upon by business and household customers.
Poor after-sales service, scant feedback from customers and inability to respond quickly to complaints or suggestions are problems every startup owner faces soon after launch. Unless a client – corporate or individual – feels cared for, they will move away to others who offer better customer care.
A classic example of startups where extra attention is required for customers is the car-flipping ventures. Such startups buy old vehicles at throwaway prices, refurbish them to working condition and resell at higher price. However, they often fail to provide after-sales service such as maintenance of a sold vehicle.
Often, the owner may have to run helter-skelter to find spares which can be rare or hard to find in the market. The result can be disastrous: The startup owner can end up with a lawsuit or will steadily lose business due to poor word-of-the-mouth publicity.
There are no hassle-free businesses. Even giant corporations and Multinational Companies (MNCs) encounter myriad problems daily. Yet, they have specialized troubleshooting systems and teams in place to counter any exigency.
Sadly, startups lack these systems. Hence, startup owners can do better by restructuring their enterprise to ensure maximum efficiency and proper utilization of resources for higher productivity.
Those venturing into startups can try and eradicate these problems before launch to ensure they do not become vexing issues later.