5 Reasons Startups Fail And How To Avoid Making These Mistakes

The startup ecosystem is ripe with stories of failure and success. It’s important to gather real-world experience to navigate the startup lifecycle and learn from the pitfalls. With a staggering 90% failure rate, we look at the most common reasons why startups fail and what to do in order to not capsize your endeavour. As follow are the top 5 lessons for startups to be successful.

How to Avoid Mistakes by Leapfunder

5 lessons for Startups to be successful

1. Manage conflict between founders

Problems in startups commonly stem from conflict between founders. Founders often want to do it all themselves and wind up spreading themselves too thin. It’s impossible to accomplish everything on one’s own, which is why a balanced team is so important; the capabilities of one should complement the weaknesses of another. A strong team shares values and work load; one team member will be a finance specialist while another will be in charge of product development.

“People really are everything in business” – Jesse Jacobs, Founder of Samovar Tea Lounge

65% percent of all startups fail due to co-founder conflict (higher than divorce rates!): “who gets to decide”, “who gets what” and “who’s idea is better” are the main sources of disagreements. A startup’s team is usually the number one reason investors decide to invest in a startup, so a strong team is more likely to raise funding. Communication is key to managing conflict, not overstepping boundaries and to working in the same direction. Sharing a vision with co-founders is what makes a team dynamic, driven and determined.

2. Bridge the equity gap

The most difficult phase founders face is the ‘equity gap’ and many startups don’t make it past this point: that awkward time between their earliest injection of personal funding running out and future VC rounds. Some startups typically get initial funding from close ones (‘FFF round’: Friends, Family and Fools) which also means a lot of shareholders, and with it the risk of being less attractive for future investors.

“Leapfunder facilitated the administrative and legal settlement of the convertible note. Thanks to this we could welcome more than 25 new investors.” – Menno Kolkert,  CEO of Plot Projects

Leapfunder is a way to bridge the equity gap, making fund raising less time-consuming. Our core product is an online tool accessible to any startup where all the legals, clearing and settlement of an investment take place in a few minutes. All investments are made under the same conditions – via Leapfunder Notes – and funds from multiple investors are pooled into one entity, bringing structure to investments. For more information you can contact us and also learn from a real startup what it’s like to bridge the equity gap with Leapfunder.

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3. Validate the need for your product

42% of startups fail because there is no market need for their product and 14% fail because they ignore customer needs! Never lose sight of why you are building what you are building and who it’s for. Keep in touch with your potential clients, listen to their feedback (ex: alpha and beta testing) and validate the product idea with them.

“We built the website first and asked our customers about it later” – Robin Chase, Co-Founder of Zipcar

In the Lean Startup philosophy, the MVP (Minimum Viable Product) is a version of a product that allows a startup to gather a maximum of information about customers, with the least effort. Instead of building a full website and getting maximum footwear inventory, Zappos founder Nick Swinmurn first visited a couple local stores, taking pictures of their shoes and posting them on a simple website. Once the clients ordered he bought the shoes full price himself and shipped them out: This way he was able to test whether people were willing to buy shoes online or not before he created what turned into a billion dollar business.

“I built a product without understanding the market or the users” – Sandi MacPherson, Editor-in-Chief at Quibb

4. Keep your eye on the financials

Many startups successfully raise funds… and fail nonetheless because of financial mismanagement. It’s just as important to follow expenses as it is to establish a solid relationship with investors (setting ground rules and expectations, compatible goals, sharing information, etc). Know where money is coming in a going out, what expenses are necessary and which ones aren’t. An unnecessary hire, a nice, big office, company merchandising… many startups realize too late they’ve set themselves up with too many fixed costs.

“We wasted $1,000,000 on a company that never launched” – Hiten Shah, Co-Founder at KISSmetrics

You’ve spent hours preparing your pitch and presenting to investors, don’t let that time and investment go to waste. Keep a close eye on the books and know the financial state of your business. Having frequent and clear communication with investors will also help to have a clear view on spending.

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5. Network – Put yourself out there

It’s important to know what is going on in the startup world: make time to get out there and mingle, to hear from others about what they are doing and how they are doing it. It’s always a good “mini-pitch” practice and an opportunity to establish new connections. Our Round Table Sessions offer startups the opportunity to meet investors face-to-face in an informal setting so they can ask questions, get advice and even meet potential future investors. Don’t miss your opportunity to join our next Round Table Session or other events.

“The greatest benefit from attending the Round Table Session came from talking with an investor from the Leapfunder network and having him invest enough later that night to help us achieve our minimum of 15,000 Euros before the first cutoff date.” – Tim Gauldin, CEO of Nestegg Biotech

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