Starting a new venture is among the most difficult things that anyone could attempt to do. Given the dominant state of e-commerce and web-based applications, starting and sustaining business venture online today has become all the more difficult. Failure is an integral part of entrepreneurship and there is no one way to maximize chances of success.
According to a report by CB insights, the average start-up that failed, did so 20 months after the last round of financing and after having raised $1.3 million (Please go here for the report). And as per SBA statistics, about one-thirds of all businesses failed within 2 years and half within 5 years. Let us look at some common reasons why people fail in online business ventures.
Reason # 1: Max started an online business for the wrong reason
Starting and sustaining an online business venture is difficult even if founders start with a handy cushion of capital. While start-up capital is extremely important, even more important is for the founders to have a clear vision for the future direction of the venture. Can you tick off all the below check-points? If you are starting an online business, you should be able to!
- I have a strong passion for the area served by the venture
- I have experience (or extremely strong skills) in the relevant domain and technology
- I am generally able to learn from failures
- I am considered good (by others) at stress management
- I have some team/project management experience
Reason # 2: Insufficient managerial skills or managerial inexperience
The unique thing about many start-ups is that you see kids fresh out of college bring in fantastic ideas into ventures of their own. While the often quoted cases are those of Microsoft and Facebook which were started by college drop-out founders, the fact of the matter is this – on the other side of such success stories lie thousands of online businesses started with promise which quickly fell by the wayside. Most founders at start-ups do enter with some prior managerial experience (even if it is in unrelated sectors at lower levels). If you do not have a founder with some managerial experience, you are opening yourself up to a higher risk of failure.
Reason # 3: High levels of cash burn
This ranks among the top reasons why online business ventures suddenly fail and close down. Online business ventures consume enormous amounts of cash to fulfil multiple needs. Be it server hosting, software licenses, storage or office space, online ventures are notorious for being extremely expensive to run. To manage costs, entrepreneurs need to hunt down the best free services, the top VPN services, reasonably priced domain and hosting services, and more. The fact that founders don’t take a salary seldom provides any relief on this front. So please be forewarned – without quickly raising revenue or funding (or by drastically cutting costs if needed) you can suddenly find your venture in the dock very quickly.
Reason # 4: Expanding too early
This also places close to the top of the list. Consider the case of the many start-ups which failed in the US during the dot-com bubble. Many of them had an idea that gained significant initial traction in the marketplace and were able to attain good customer growth in the initial 6 months or so. However, post funding rounds by PE and VC investors, some of them got complacent and embarked on expansion plans which proved overambitious. Always do watch your expansion plans – A close look at the monthly revenues and cash reserves in hand will show up many of the expansion plans to be full of holes.
Reason # 5: Inability to manage product development
One prominent example of an online business venture that failed due to its inability to execute product development was MySpace. While MySpace was one of the earliest social networks, it ultimately ceded almost all market-space to Facebook and ended up being sold at a loss. The primary reason why MySpace failed was that it failed to execute development of its functions and user interface in a bug-free manner. At the same time, Facebook brought in a different flavor to social networking and an open-development approach, hammering the nail into MySpace’s coffin. It is key to have Technical Leads and developers with experience in developing software that can meet and beat the stratospheric quality standards of today.
Reason # 6: Swept out of the marketplace by a behemoth
Although regulators watch the market with a hawk-eye, it does happen that a cutting-edge product gets imitated at first (the highest form of flattery) and ultimately swept out of the market by a behemoth. This happened with Netscape Navigator, the pioneering Web browser. While Navigator held fort for several years, with Microsoft developing a competitive browser in the form of Internet Explorer, ultimately Netscape Navigator (later, Communicator) ended up ceding the crown to IE.
Reason # 7: Lack of marketing skills
In all the playing around with admittedly exciting technology and software, the marketing piece of the puzzle can get lost out. Marketing is not only about trying to sell more of what you have, it is also about designing a product/service for your customer’s needs. Lack of attention to the marketing function in an online business venture from the start can lead to products/services that are targeted at a customer niche which simply does not have enough folks to target. It also often leads to products/services that are not designed ground-up for customers and for this reason face rapid failure in the marketplace.
About the Author: Mauricio Prinzlau
Mauricio Prinzlau is the CEO of Cloudwards.net, a data and user feedback driven comparison engine for cloud apps and services. He enjoys writing and producing educational videos around the cloud to help people find the best cloud service for their needs.