Critical Mistakes That Make Your Startup Doomed to Fail
Mistakes That Are Easy to Make, But Tough to Spot and Tougher to Accept
Last month when PM Modi launched his “Start Up India, Stand Up India” campaign at an event in New Delhi, the crowd present at the event and media attention attracted by the campaign made it very clear that startup wave in country is only about to increase its pace. However, more than 90% startups that emerge from this wave are destined to die. I’m not discouraging anyone, but this is a harsh reality of this optimistic and attractive world of startups that 90% of companies die within first five years of their operations.
Despite this high failure rate startup ecosystem continues to attract attention of investors and entrepreneurs both. Why? Because the remaining 10% that survive after 5 years make the history. There’s only one problem: everyone wants to be a part of that 10%! And while it’s not impossible to join that club of successful entrepreneurs, it’s tough. It’s not easy because wisdom comes from failure, and in our country failure isn’t celebrated like Silicon Valley. In fact, in our country failure can be very disastrous.
Of course, PM’s campaign includes stuff that’ll decrease the cost of failure, but those things can decrease the financial cost only. There’s not going to be any significant change in the level of social pressure faced by the entrepreneur of a failed startup – at least not anytime soon. Therefore, it’s important to learn from the failure of others, something that all successful entrepreneurs do. You might already have heard about its importance, but it’s significantly more important in India, because the cost and pressure associated with failure is much higher in our country.
So here we’re going to share 7 most common mistakes that entrepreneurs make while building the next unicorn. Some of them are so tricky that they may easily escape your eyes. Have a look and make sure that you don’t become a victim of them:
Mistake #1: A Me-too Business Model
While no one actually likes to accept the fact that his startup is based on a me-too business model/concept, it turns out that more than 99% startups built up in India are clones of some US companies. But that’s not the main problem – even that thing may work if there’s a first-mover advantage attached to it. The problem arises when 10 – 15 other guys take the same idea, modify it slightly and build more startup based on those slightly modified concepts. While no one likes to admit the fact that his business has been doing this, those startups are bound to fail.
This mistake is tough to accept because our brains are wired in such a manner that if we work on something for a while (even if it’s something as intangible as an idea), we start feeling a bit of ownership towards it. However, making this mistake is just like trying to build a skyscraper on weak foundation – it’s bound to fall. If your company is selling a product that someone else is also selling then there must be a compelling reason for the customer to choose your product over others. If there’s no such reason, you should avoid building a startup based on that product.
Mistake #2: Under Estimating (Or Over Estimating) the Capital Requirement
Every type of business requires a certain amount of capital to turn a profit (called ‘operating profit’ or ‘break-even’ in startup lingo). Provide less than that and you’ll find yourself in the mid of the sea with no fuel. Over estimate the requirement and you’ll end up coming under intense pressure to reach the shores ASAP. I don’t want to name any particular company, but many startups have died because they made a mistake in their estimates. Therefore, it’s very important to assess your financial requirements properly, and there’re only two ways to do it:
- Keeping an unexpected growth in mind while making your estimates so you can meet the demand if your startup becomes popular, and;
- Being alert on the field – your eyes should repeatedly go on the fuel gauge (your company’s bank account) and you should start looking for money when there’s only 3-6 months of operating cash in the account.
Mistake #3. Faulty Monetization Mechanism
Monetization is a tough nut to crack, especially for Indian startups. But at the same time it should not be too difficult if you can provide considerable value to your customers. Indian users always crave for value out of every pie that they spend – if your company can provide a valuable solution to any problem that’s being faced by masses then it can certainly find a market large enough to support itself.
Another way to bypass this problem is by launching a B2B startup rather than a B2C one. Remember, few customers who can pay well are much better than a hundred thousand that don’t want to pay. This technique has also been tested by many entrepreneurs, so it’s definitely worth considering at least once for your business.
The key thing is to have a proper monetization plan for your business – if not from day #1, then definitely by the end of 6 months. Whether you decide to go B2C or B2B, you should have a validated monetization plan otherwise you’re headed for some serious trouble!
Mistake #4: High Cash Burn Rate
Burning cash for growth can be a tricky thing. While it allows you to grow significantly faster, too much of it may also create a serious threat to your business when winds of investment change directions. And that’s the tricky thing about it: Just about how much is TOO much? And there’s no single answer to this question. While e-commerce biggies are surviving even after burning millions of dollars, others may find them in trouble, especially if their startup belongs to e-commerce sector. Here’s a quick look at how much cash top Indian startups are burning every year to have a so-called competitive advantage:
| Company | Spending |
| Flipkart | Rs. 3,700 crore per year |
| Snapdeal | Rs. 1,600 crore per year |
| Amazon | Rs. 1,400 crore per year |
| Ola | Rs. 1,500 crore per year |
And these’re rough estimates based on information available in media. The original figures may be much higher than that.
However, in the end even this strategy comes down to basics – the companies that’ll have the highest probability of turning into profitable business will survive, so you should have a solid business model. At some point in future even biggies are gonna be bound to control their cash burn rate, and there’s no reason why you should not prepare for it from today.
Mistake #5: Focusing Too Much on Valuation
A majority of startups today are focusing too much on valuation game. What they’re trying to do is inflating the valuation of the company, make some quick bucks and exit. They scale too fast by spreading operations to 8-10 cities simultaneously, spending heaps of money on advertising, launching dozens of new features in a single day and hiring people from other giant companies by offering mouth-watering salaries. However, this is a recipe for disaster – if you eat more than you can digest, it almost always fires back. Such founders often struggle to survive as soon as a round of financing deal fails to close on time.
Always remember that founders’ passion always tends to be one of the biggest ingredients behind the success of any company. If founders aren’t genuinely interested in the company and are interested in making quick bucks instead, the company becomes more of a political party than a business. And the unfortunate (or fortunate, depending on how you think of it) thing about businesses is that they can’t be run successfully from the principles of political parties. By the end of the day, investors tend to be 10x wiser than a common men.
Mistake #6: Falling Prey to Labor Issues
Logistics related startups suffer the most from this problem. The issue of labor is also one of the toughest ones to solve, thanks to several labor unions that have sprung up everywhere as a result of support from local politicians. To solve this mystery startups have also tried several solutions, one of which is India Post. I feel that India Post can become a good solution for this particular problem because it not only controls cost but also provides one of the most robust networks for pan-India delivery.
Other domains that tend to be labor intensive include grocery e-tailing, cab services, food tech etc. Each of these domains has got its own set of labor challenges. For example, grocery e-tailing requires a mechanisms to stop theft, control damages and ensure quick delivery etc. These difficulties are further increased by the low-margins of this domain. In such a scenario the only way to survive is a high customer-retention rate. A large pool of repeat customers can keep your business afloat even during bad times. But again, it comes down to point #1 – the customer should have an appealing reason to buy from you, and that reason should be something different from ‘steep discounts.’
Mistake #7: Making Product Without Listening to Customers
Finally, always keep one thing in mind: No expert is more expert than your customer. There’s plenty of advice available for entrepreneurs, but in the end only customer decides whether to use your product or not. So rather than listening to them after making your product, prioritize their requirements and survey them before making the product. Once you find out what they want it becomes much easier to build a product that suits those requirements. Don’t fall in love with your vision so much that your customers get left behind.
Robin Chase, the founder of ZipCar, had first founded a company called GoLoco, which folded because of this particular mistake. While both ZipCar and GoLoco provided innovative ways of transportation, GoLoco was designed before surveying the customers. Robin himself admitted this mistake, and fixed it while building ZipCar, which took off successfully and is doing well.
Conclusion
While it’s great to get inspired by the million and billion dollar valuations of giant startups, it’s also important to be realistic and keep your feet on the ground. Don’t turn your back towards the risks because they may come to haunt your business as a rude shock. Always learn from the mistakes of other entrepreneurs from your domain. Networking is the key, because this provides you the opportunity to understand the stuff from original source. There’s no single formula that’s going to work for each and every startup – it’s your job to find your path.
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