"2021 will be the year of the unicorns," "German startups are raising more money than ever," "From a garage to the most valuable corporation" – there are great success stories of founders to read about in the news. However, barely anyone talks about the many failures in the startup world. And believe me, there are way more than you might think. While it seems deceptively easy to found a successful start-up, this is not really the case. Rarely is a start-up so well-tuned to its niche that it can be kept afloat with minimal effort. The momentum among founders is high, but in the long run only one in ten companies survives. In this article, we present the most common reasons why start-ups fail.
1. No Product-Market-Fit aka. Market Relevance (No one cares about your product)
The most common cause of death for start-ups is the lack of market demand. For months and sometimes even years the business idea is worked on, analyzed and developed. With the perfect product, founders want to conquer the market. Many forget the market itself – I’ll give you a hint: It’s all about product-market fit (PMF). If the demand is not there and the solution offers no added value, you can bury your start-up. No matter how good your product is! Achieving product-market fit is one of the most important tasks for founders. The solutions a product offers and the purpose it serves make up the majority of the brand value.
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What happens if you fail with product-market fit
In the current season of "Die Höhle der Löwen," two men presented a product that was supposed to solve a "woman's problem." The appearance caused fierce criticism. The founders of Pinky Gloves have "developed" a pink latex glove that menstruating humans can use to remove and dispose of tampons. "Hygienic, discreet and perfect for on-the-go" is what Pinky Gloves claims to be. This idea caused a lot of resentment and a major shitstorm on social media. The main accusations: the product is sexist, does not solve any existing problems and above all superfluous. Product-market fit has gone totally wrong! How do the founders think menstruating women have removed their tampons before? Where is the added value of the product?
In a statement, they explained that the product is primarily intended for on-the-go use. However, people have also managed to cope with their periods and the disposal of the products at festivals or while traveling. Conclusion: the founders have tried to create a problem in order to sell a solution. This is what many do – constructing and assuming a need. However, the product has no market relevance and during the pitch it became clear that the two founders have not dealt with their target group and did proper market research. Surprisingly, there was an investment for Pinky Gloves. However, this shows that an investment won’t help if the product is superfluous to customers. This quickly became apparent: Only a few days after #Pinkygate, after many complained about the investment and it developed into a full-blown shitstorm, Mr. Dümmel and the Pinky Gloves founders announced their market exit.
The start-up Yapital had an ambitious goal. Millions of customers were to be inspired to use mobile payment. They talked about a revolution. Nonetheless, the problem that Yapital wanted to solve didn't exist. The product promised to make the payment process faster and more convenient. The start-up relied on QR codes on the smartphone screen, which are scanned at the checkout.
A revolution in mobile payment? Not a chance. Instead, users first had to recharge credit, register in the app, have a QR code generated by the cashier and hope they had good lighting conditions when photographing the code. Often, store employees didn't even know that Yapital was offered. Conclusion: Mobile payment as a singular product does not work. Neither the stores nor the users got any added value from the product.
2. Running out of cash
Startups usually don't have enough money to overcome long-lasting crises
For a company to grow, it needs money. The CB Insight study puts the percentage of companies that failed due to cash flow problems at 29 percent. When a startup runs out of money, it must cease operations and is doomed to close its doors. Wrong financial planning decisions bring many startups to their knees. Often, founders underestimate their financial requirements, forget about costs, fail to find investors in time or place their company in the wrong hands. Crises like the Corona pandemic are an additional threat to start-ups. In a survey conducted by the German Start-up Association, more than 80 percent of companies stated that their existence was threatened by the pandemic. In addition, many start-ups do not earn any money in the first few years and are therefore dependent on financing rounds. But this money no longer flows as it did before Corona. For example, according to a survey by the portal "Start-up Genome," global investments fell by 20 percent by the end of April; according to this survey, four out of ten young companies only had money for a maximum of three months.
The Berlin-based start-up tausendkind slid into insolvency at the end of March 2020. The balance sheet loss most recently totaled around 30.6 million. Due to the poor economic situation, one financier had withdrawn its commitment for a new financing round.
3. Tough competition
The startup landscape holds many risks and not all companies are up to this great competition. If a startup succeeds, it also depends on the competitive situation in the market. A study by CB Insight reveals the 20 most common reasons why startups fail. 19% of the start-ups said that they failed because of competitors.
The trend of having food or groceries delivered to your home has seen delivery services grow rapidly. Berlin-based Hellofresh is a beacon of hope for many food startups. In 2019, the company was able to generate 1.8 billion euros. However, a number of startups with similar concepts have failed. Eating with the Chefs had tried it with a similar idea: Cooking boxes were delivered with ingredients for dishes that were supposed to taste like in a Michelin-starred restaurant. Despite investing millions, the founders gave up in 2018.
More and more startups want a piece of the growing food segment. The Berlin-based start-up Gorillas caused quite a stir. In its latest round of funding, Gorillas secured EUR 244 million. Just a few months after its launch, the company reached their Unicorn status and therefore is valued more than EUR 1 billion. The startup promises grocery delivery within 10 minutes at supermarket prices. This unique selling point is sure to worry existing delivery services.
Gorillas is not without competition, however. More Gorillas-style services are currently popping up all over Europe. In this country, the biggest Gorillas competitor is Flink. The start-up recently raised EUR 43 million. Even more, the competition is far greater abroad.
4. Bad Marketing
Fast and sustainable growth only works with successful marketing. Especially for start-ups that have not been established on the market for long, a good marketing strategy is essential. What good is the best product if no one knows about it? The marketing sector is in a constant state of flux. If you want to approach your customers not only in a targeted way, but also in a state-of-the-art manner, you have to keep an eye on the trends. A little Facebook and Instagram just won't cut it and can't replace a professional sales or marketing person. Marketing and analysis must be done full time from the start. Developing possible marketing or sales strategies on the side is nearly impossible. Gaining the trust of the target audience takes a lot of time and work.
Marketing can also end in a shitstorm at worst. With the launch of a new product, the start-up Reishunger came under massive criticism. The trigger: a product with the words "Ching Chang Chong" and a monkey holding a spoon. On Instagram and other social media, these words triggered outrage. For many people, the slogan was racist. One Instagram user wrote under the product photo, "Those who need stereotyping and structural racism for advertising purposes just reflect the patheticness and lack of diversity. It's really scary what else is being rubber stamped at the executive level. Just boycott it."
Reishunger had received hundreds of negative reviews on social media and Google within a few hours. A shitstorm can have a negative impact on a company's image. For example, it can cause loyal customers to switch to the competition. The more the shitstorm is perceived by the public, the more sensitive the situation is for the company. Stakeholders also observe a shitstorm and how the company deals with the criticism. In the worst case, a company not only loses customers, but also cooperation partners. Reishunger was lucky that the marketing of the new product did not have any serious consequences for the business. The company reacted to the criticism and removed the product from its range. For new start-ups that have not yet established themselves on the market, poor marketing could end things quickly.
5. The wrong team
People are the most important part of your startup. More than your idea. A start-up is like being in a relationship. If there are serious problems that cannot be managed, then the only option is to break up. A negative work climate affects the overall performance, motivation and mutual trust of the team. Especially in start-ups, the corporate culture is particularly important. When someone works for a start-up, the person gives up a certain security and possible earnings. However, start-up employees do not get their motivation only from money, otherwise they would all work in large corporations.
In the growth phase, many new employees, ideas and experiences come into the company that deviate from the original start-up culture. In addition, founders often underestimate the importance of employee management. Without transparent communication, support, team culture or feedback, good employees will not feel valued or challenged. It should not be forgotten that the team is not only seen internally, but also externally, i.e. that other shareholders, investors and partners in the market are seen as part of the team. It is advisable to found a company with a contract that contains regulations on possible conflicts between the partners. This is exactly how the start-up Femtasy has arranged it. Before Nina Julie and Michael were co-founders, they were first colleagues, then friends, and are still a couple in private life. Founding a company as a couple naturally involves risks, but a contract provides clarity in the event of disputes. This clarity is also positively received by investors.
6. Legal issues
Legal problems can deprive startups of their existence before they have even set foot in the market. Apart from developing a relevant product, it is essential to be aware of the legal framework. Often the regulations are not clear, this makes it difficult for German cannabis start-ups, for example.
Operating in a market where the legal situation isn’t clear can break as a startup, as you usually don’t have the assets to wait and fight against legislation.
The "German Cannabis Report" by the British analysis firm Prohibition Partners predicts a market volume of 7.7 billion euros for medical cannabis by 2028. Experts assume that Germany will play a central role in the growth of the industry. A trend that is reflected in the founding of numerous start-ups. However, the legal situation for many of these products has still not been conclusively clarified. For example, the classification of a product needs to be clarified, with categories often being ambiguous. According to the German Federal Office of Consumer Protection and Food Safety, products containing CBD need approval as medicinal products or as "novel" foods." This would also require a guarantee that the product in question is safe. The legal complexity can stall startups. In December 2020, the start-up "Bunte Blüte" was charged with gang-related narcotics trafficking. The startup sold CBD flowers to kiosks in Germany. Several times, the goods were seized. Now the Federal Court of Justice (BGH) has ruled: Selling CBD flowers to end customers can be legal, but only if it is ensured that no one gets high from them. The ruling will make cannabis start-ups happy, but should only be taken cautiously. Despite the ruling, there will be regulations through the Narcotics Act that will continue to make it difficult to distribute cannabis products. Due to the unclear regulations, European investors are still very hesitant. An investment in the field of medical cannabis is a risky bet. The success of cannabis startups depends heavily on how the legislation develops. Founders need a lot of perseverance here.
7. Timing is everything
Timing is one of those hardly predictable things. The product is good, and everything else fits. But the founders are too late, i.e. the competition was faster. Or they are too early. The market is not yet ready for the new product. Finding the right timing is not easy. In the worst case, the start-up runs out of money during this time.
The luck of the draw - that's how you could describe the development of the start-up Happy Po. The Corona pandemic is threatening many young companies with extinction. At the same time, Corona opens up new business areas, especially for start-ups. For the founders of HappyPo, Corona was a catalyst to success. With the spread of the Coronavirus, toilet paper increased enormously in value for no apparent reason and, above all, very suddenly. Toilet paper was in short supply. The perfect time for HappyPo. With a handy butt shower, the start-up offered an alternative to toilet paper. The two founders said they increased their sales sevenfold during the pandemic. The demand is enormous. We used to clean our butts with moss, then sponges, newspaper and finally toilet paper. Now seems to be the right time to take the next step in development. Furthermore, the trend topic of sustainability benefits the company. With every use of HappyPo, toilet paper is to be saved - and thus trees are to be preserved. Statistics show that there is a higher willingness to pay for sustainable products. This benefits sustainable start-ups.
Founders must conduct a good market analysis and correctly assess whether there is a need and whether enough people are willing to pay for the product or service. It often happens that a start-up fails and a few years later another company sells exactly the same product with great success. Often, a portion of luck is involved.
Learning from mistakes
Fail fast: Learn and embrace your failures to keep on moving. As a startup, this is one of the most important lessons you can learn!
Building and running a startup is very complex. The reasons for failure can be just as complex and multifaceted. Often, however, it is not just one of the factors that leads to the failure of a start-up to succeed, but an interplay of several reasons. In Germany, founders do not like to talk about failure. Yet there is much that can be learned from a start-up that has gone wrong. The probability that start-ups survive for a period of more than 5 years is low and really demands everything from the founding team. Nevertheless, this is no reason to give up. In Germany, attempts are being made to deal more openly with the subject of failure. In many cities for example, the FuckUpNights have been taking place for a few years. Here, failed founders talk about their low blows and failures, but also about how they managed to get out of the trough, and that's exactly what matters.
//Article written in collaboration with Linh Pham.