Why do start-ups fail?

My association with Startups goes back to 2009; since then, I would have worked with over 200 start-ups. While writing this, I realized that only 7 of them are functioning as on date; most of them have failed in the first year of operation. My analysis coincides with the global survey, which says around 97% of start-ups fail within the first 5 years.

If the failure rate is so high, why do people venture out again?

Take for example, for 900 posts, over 8,00,000 people write the Civil Services Exam, and for 15000 IIT seats, over 9,00,000 students attempt the exam. This happens year on year. A minuscule pass percentage or success rate is not a deterrent for people to take up the challenge. Each one of us believes that we have the protentional to make it.  So is the case with Startups. Every young entrepreneur thinks that his venture will succeed.

Why do they fail?

I can list out 20 or more reasons for the failure. But I will cover two major points here.

# 1 – Market Reach – Usually start-ups work on wafer-thin margins. To make lots of money, they must have a large user base. But how to get them? This is where the problem lies. To reach the crowd, one has to spend on advertisements.

Advertisements don’t come cheap. To advertise in print or TV media, you have to shell out Lakhs and Crores of rupees, and social media is no different. Ads are like black holes, whatever you put and how much ever you put, will be sucked in no time. Further, to register the product or App in the minds of the people, one has to be visible continuously over a couple of years or till such time, a large base is established.

So, the first reason for failure is poor market reach. 90% of the start-ups fail here.

# 2 – Upgrading the Application – It requires high-quality resources to continuously add new features, new verticals, etc. The start-ups start with a small team, but to scale up they need more people and they come with high packages, ESOPs, etc.

To retain them, one has to have a fat bank balance, in the initial 3 to 5 years. As I said earlier, the idea of start-ups won’t earn big margins and won’t make profits so easily.

This is the second reason for failure; being unable to find good talent and also, retain them during hard times!

Money Tap – The whole start-up ecosystem works on spending as much as it can to achieve both the objectives stated above. For doing this, all that is required is a perennial flow of money. Initially, they get money from Angels, then from fund houses. If there is a delay in getting the funds from the investors, even for a couple of months, the Startups will become End-ups.

Getting money taps flowing like water is not an easy task. Lack of vitamin M is the third reason for the mass failure of start-ups.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 28+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional, Registered Valuer (F&SA) and Social Auditor.Prasad welcomes your comments and questions. Please email him at simplifiedlaws20@gmail.com

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Hari Sai
Hari Sai
2 years ago

Nice explanation sir

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