How sturt-ups can save their software product from failure?

Being in IT for 10+ years, I’ve met more than a couple of people who at some point of their career have at least a thought of starting their own business. Those who really started turning this into a reality never reached the final goal and successful development of their endeavors. The reasons were different and seemed plain to see. But I decided to get an insight into the reasons globally: why do start-ups and software products fail in general?

Harsh statistics

Without long intros, let’s look into the statistics from-the-go.

As for the 2021, there were 32.5 million small businesses in the US, which is 99.9 percent of all businesses in the US. According to Bureau of Labor Statistics around 50% of all new small businesses collapse in 5 years.

The figures for startups are way more harsh, since not each small business is technically a startup. Startups are specifically about innovation and growth: they are created to test brand new assumptions (technology, product, services) and are highly scalable with the potential to grow exponentially rather than linearly.

Each month, dozens of innovative ideas appear, but the failure statistics across all industries is high. Diving deep into the widespreadly quoted facts and figures:

• A pretty well-know fact that about 90% of startups fail in a long run; Startup Genome reports only 1 of 10 startups makes it to the top
• 10% of startups usually drop out within the first year (Failory)
• 70% of startups fail in 2–5 years (Failory)
• Failure rates across all industries seem to be close to the same (Statistic Brain Research institute)

If talking about industries more precisely, the highest failure rate is observed in the Information technology, that is software products.

Source: Statistic Brain Research institute

On average, the statistics differs from source to source to the limit of 10%. But strict accuracy is not the thing here, as early-stage startups do not usually raise funds from investors while some of them do not even have a legal entity (that is quite natural, as they do not need it to test the idea itself). Therefore, a lot of startups just die unnoticed. Failory even has a separate page with a startup cemetary.

So, the simple truth is startups are 100% risky, though rewarding once they succeed.

From a unique idea to failure: why do products fail?

The reasons of startup failure vary from source to source, but there are 5 most common ones. So, here is a bit more statistics:

1. Marketing issues

The number 1 reason reported by CB Insights, Embroker and many others is a lack of product-market fit. According to Failory, who interviewed more than 80 failed startups, 34% of projects fall flat just because nobody needed such a solution.

Another 22% reported their marketing mistakes were (descending value): competition within the industry, lack of value proposition, retention of users, small market size, lack of focus on core directions.

So the picture is tough to believe in: 56% of projects died due to lack of market research and a systemized marketing approach. Moreover, the “fatal marketing mistakes were more numerous than all other fatal mistakes altogether (56% vs 44%)”.

2. Finance issues

According to CB Insights, the second most fatal reason is “running out of funding and personal money” (29% of cases). Failory reports 16% of such cases within their research. So I guess, something in between is the real statistics.

If talking about the financial aspect, I do not mean funding solely. The funding is especially crucial when the project starts developing into “a real business”. To financial issues we also add ill-conceived monetization, low profit margins, and overspending.

3. Team issues

On average, about 20% of startups went under due to team problems (21% according to CB Insigths, and 18% to Failory).

It’s worth mentioning not only team disharmony (such as different motivation, effort contribution and friction), but also lack of experience including marketing, business, tech and industry/domain.

4. Tech issues

It is rarely a killer reason (about 6% of cases). The biggest mistake is extra investments in expensive technologies and extra features before validating the idea and the market.

5. Operations & legal issues

Those 2 aspects are the most rarely fatal. Failory reports only 4% of cases when projects failed due to operational or legal issues (2% for both respectively). Though, CB Insigths reports 18% of cases when regulatory or legal challenges where the top failure reason.

Source: Failory

Core recipes of success

Yes, startup is always a high risk. But taking into account all those figures and analytics, adopting experience of both failed and succeeded businesses & products, there is a way to increase the chances of becoming the 1% of the prosperous.

1. Market(ing) research

As mentioned above, a lack of product-market fit is a number one and the most fatal reason for startups and software products to fail. Hence, the number one lesson here is to make a proper, accurate market research to prove your software product is viable and in demand.

Before going head over heels and looking for investors — define your target audience, conduct a competitive research, talk to customers, test your assumptions and the market. In a nutshell, make sure people need your product and are ready to pay for it.

Such best-practice approaches as CustDev, MVP, PoC, Pretotyping will help you to test your target market, make new assumptions and go forward. Learn more here.

Note: According to Deloitte, a customer-centric business is 60% more profitable.

2. Synergy within the team of stakeholders

Lesson number two: make sure your team shares the same vision and has motivation to put their efforts into the project. Otherwise, ”you’ll pull the project in different directions”.

It’s a pretty well-known fact that any successful startup needs a hustler (someone, who is good at selling and marketing), a hacker (responsible for technical side), and a hipster (someone who’ll make the product look sleek and cool). It’s very hard to be both. So it’s highly important for the stakeholders to be skilled in different directions in order to complement each other and the product itself.

So set goals, sync your vision & expectations, and divide responsibilities.

3. Avoid overinvesting

Startup is a risk in essence, but investing huge amounts of money at an early stage for extra features and expensive technologies is even riskier.

Make it lean and test your idea. If unsuccessful — pivot!

Note: Startups that pivot 1–2 times have 3.6x better user growth and raise 2.5x more money. Startups that pivot 0 times or more than 2 times do considerably worse.

4. Accept the risk

Just take the medicine of the fact, that even following all business best-practices and making sure your team is ticking the right boxes, the probability to fail is REALLY high.

But, you still can think of your financial and personal stuff beforehand and make sure you’ll be able to bear that failure.

There is still a chance

Failure is not the end.

Truly motivated startupers & founders as a rule learn lessons from failed attempts, and launch a successful venture. The other ones (acquired great experience with launching their own project/product) find good job offers.

Obviously, not every entrepreneur has resources for another try, but with another attempt comes greater potential and more chances for success.