Why Startups Fail and Strategies for Staying Afloat

October 18, 2023
min read

Recently, TechCabal broke the news that DASH, a Ghanaian fintech startup, had closed its doors for good. Surprisingly, lack of funds wasn't the culprit; the company had raised an impressive $86.1 million in just five years. The real reason for its downfall? Mismanagement. This serves as a cautionary tale, highlighting a bitter reality: behind the dazzling headlines, eye-popping fundraising numbers, and charismatic leaders, lies the challenging, often gritty world of startup entrepreneurship. While running out of money has long been regarded as the prime cause of startup failure, contemporary trends reveal a far more complex landscape. The hard truth is that even well-funded startups can find themselves navigating treacherous waters, eventually leading to their dissolution. Some may even choose to close shop rather than fight through the obstacles. In this article, we'll delve into the critical issues that can lead to a startup's demise and offer tangible strategies to weather these challenges, drawing lessons from those who couldn't.



Why Startups fail

Aside from a lack of funding, startups can find themselves on the way out of the market for the following reasons

1. Inadequate Market Research
The bedrock of any startup is a deep understanding of market needs and demands. If a startup's offerings don't address a genuine need or solve a problem, its prospects are grim. A common downfall for many startups is launching products or services for which there's little to no demand, making survival in the market nearly impossible.

 2. Financial Missteps
Poor financial management is a significant factor that leads to startup failure. Whether it's blending personal and business finances, extending credit too liberally based on emotional judgment, inflating the startup's valuation, or excessive spending by the founders, financial missteps can quickly lead to a startup's undoing. The story of DASH serves as a prime example of how financial mismanagement can derail even a well-funded venture.


3. Faulty Business Models
An unsustainable business model is another fast track to startup oblivion. Some startups operate on a one-dimensional model that fails to adapt to market fluctuations or competitive pressures. For instance, GoMyWay, a carpooling & ride sharing platform in Nigeria, had a business model that allowed users to bypass the platform after initial contact, transforming it into a mere networking site while losing out on transaction-based revenue.

4. Regulatory and Environmental Challenges
Unfavorable business conditions, often dictated by government regulations and economic volatility, can be a significant setback for startups. Countries with unstable business climates—like Nigeria, which is fraught with economic instability, compliance issues, and legal obstacles—can be particularly challenging. These factors have caused even seemingly promising ventures, like online marketplace, OLX, to struggle.


5. Leadership Conflicts
Investors often require the presence of a co-founder, but internal disputes between co-founders can spell doom for startups. Disagreements at the executive level can create a turbulent atmosphere, clouding the startup's future. The case of Zipcar exemplifies this, as disputes over equity distribution between co-founders Antje Danielson and Robin Chase nearly led to the company's downfall.


6. Failure to Meet ROI Expectations
Investors are drawn to startups because of their potential for high returns on investment (ROI). When a startup fails to deliver the anticipated ROI, its longevity becomes questionable. Online classifieds marketplace, Efritin.com serves as a case in point—when it struggled to meet ROI expectations, it couldn't sustain its operations.


7. Exorbitant Operating Costs
A significant impediment to profitability is high operational costs. When expenditures continuously outpace revenues, the startup's existence is jeopardized. For example, online stores Jumia and Konga went to war over market share and spent an outrageous amount of money on ads without significant revenue, and profit to show. Jumia was able to raise more money and Konga struggled to match. This financial imbalance forced Konga into acquisition by Zinox. Jumia is still trying to become profitable.



Turning the Tide: Proven Strategies to Help Startups Defy the Odds


The disheartening rate at which startups close shop is a call to action. The good news? By recognizing and proactively addressing these common challenges, your startup can defy the odds. Here are some actionable insights:


Overcoming Poor Market Feasibility:

1. Emphasize robust market research to discern consumer needs and trends.

2. Know your target audience inside out, so your offerings meet real demands.

3. Adapt your products or services in response to market shifts.

4. Routinely gauge your market standing and industry trends.

5. Make customer feedback your secret weapon for continuous improvement.


Navigating Funds Mismanagement:

1. Uphold stringent financial governance and accountability.

2. Establish a clear boundary between personal and company finances.

3. Make financial decisions based on reliable data, rather than impulse.

4. Consistently update and align financial forecasts with reality.

5. Consider bringing in a financial expert to steer the ship.


Rectifying Flawed Business Models:

1. Create an agile business model that can pivot as needed.

2. Prepare for market disruptions with contingency plans.

3. Cultivate a diversified approach—always have a Plan B.

4. Don’t be afraid to pivot when circumstances dictate.

5. Periodically evaluate your business model for sustainability.


Adapting to a Challenging Environment:

1. Keep abreast of local laws and regulations that could impact your startup.

2. Engage with governmental bodies and industry groups to advocate for a more hospitable business climate.

3. Consider expanding into markets with more stability.

4. Develop contingency plans to weather unforeseen legal and economic storms.


Resolving Co-Founder Conflicts:

1. Define clear roles and responsibilities for all founding members.

2. Keep everyone aligned with the company’s vision and mission, rather than individual gains.

3. Foster a culture of open dialogue among the leadership.

4. Employ structured conflict resolution methods, such as mediation or third-party consultations.


Boosting ROI:

1. Vigilantly track your financial performance.

2. Proactively tackle any barriers to ROI.

3. Reassess and reinvigorate your marketing and sales tactics to boost customer numbers and loyalty.

4. Seek external funding judiciously and only when necessary for growth.


Cutting Operational Costs:

1. Streamline processes for maximum efficiency.

2. Periodically perform cost-benefit analyses to weed out wasteful spending.

3. Renegotiate contracts and agreements for better terms.

4. Consider outsourcing non-essential tasks to save on internal expenses.

5. Look for strategic partnerships that allow for cost-sharing arrangements.


Armed with these targeted strategies, your startup will be well-equipped to navigate the myriad challenges that lead others to shutter their dreams. Don't just survive—thrive!


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