‘A good business idea would kick start a good business’. This basic premise has fueled thousands of generations of aspiring entrepreneurs, promising that all it takes is one brilliant idea and a lot of hard work to become a billionaire. While one cannot deny the importance of an idea, it is just the beginning and not the end. Many failed startups started with an innovative premise but lost their way in the middle. As a startup, you not only need to start smart but also stay smart throughout! Through this post, we bring to you the five most common reasons why startups fail and what you can do to avoid the same.
Five reasons why startups fail:
1. Disputes Between Co-Founders
Disputes between co-founders are very common. More often than not, co-founders do not see eye to eye or have conflicting opinions on an issue. While some may be able to resolve these issues amicably, some disputes blow out of proportion and lead to the health of the startup getting damaged. Publicized spats between co-founders, one co-founder conspiring against the other, co-founders engaging in unlawful activities, etc. are some of the concerns which frequently surface.
How to Avoid the Same:
You must have heard of a co-founders’ agreement. It is a written contract which governs and regulates each and every aspect of co-founders’ relationship. From delineating responsibilities to how disputes should be resolved and what is to be done in a deadlock situation, a co-founders’ agreement captures each detail in a written form. It is pertinent to have a co-founder agreement in place in order to prevent potential disputes. Demarcation of duties minimizes friction. Moreover, set processes of dispute resolution prevent co-founders from going public with the disputes. Obligations such as confidentiality, non-competition, etc. prevent the co-founders from harming the startup in case an exit does happen. Hence, having an exhaustive co-founders’ agreement is essential to ensure your startup against co-founder disputes.
2. Lack of Funds
For any business to sustain it needs finance. Startups need scalable and profitable business models to channel the funds and make the startup grow. Insufficient funds is a roadblock that leads to countless startups shutting the shop.
How to Avoid the Same:
Knowing the right way to fundraise your startup can ease your money problems. The first step for every startup who wants to scale its business is to raise funds from investors. Before you begin the process you need to make your start-up investment ready. Focus on which securities do you want to offer (Convertible notes, equity, debt, etc.). Conduct a due diligence to assess the levels of compliance of your start-up before you approach an investor. Having a ready due diligence report to hand out to the investor showing that your start-up has been running smoothly is a great way to earn brownie points! Effective negotiation is the key to gain investment without giving up too much. Preferably always engage a lawyer to handhold you through the fundraising process. Our qualified team at LexStart has helped many startups raise funds. If you have any query you can drop us a mail at support@lexstart.com.
3. Poor Marketing
A startup can offer innovative products and services, but it would not be able to gain customers until and unless it engages in effective marketing. Without effective marketing a startup no matter how big or small would not survive in the long run. Providing the best-in-class services or products do not matter if your marketing skills are poor. You must know your target audience and know how to get their attention and convert them to leads.
How to Avoid the Same:
When one is able to measure, learn, iterate, and repeat the process smoothly with your Minimum Viable Product, one is probably ready to start marketing their product. Online advertisements through Google AdWords, Social media, print media, newspaper and email marketing are a great way to boost one’s business. By identifying the client base and listening to their feedback through a targeted marketing campaign the company can save resources while promoting their business.
4. Low legal compliance
Failure to comply with legal obligations can impede a start-up’s performance and result in a variety of repercussions, including imprisonment and disbarment of key personnel. Regulatory actions may be brought against the startup and its founders. A company in its nascent stage cannot afford such negative publicity. Moreover, running a business in violation of applicable laws is a huge red flag for investors and hence it is key to have all your legal compliances in place.
How to Avoid the Same:
Knowing what legal compliances are applicable and how to adhere to the same are crucial for a company to be legally compliant. It is hence essential that every startup consults with a lawyer in order to understand what laws are applicable to it. Each activity ranging from employing personnel to opening up an office to setting up a factory is regulated by a host of laws. It is pertinent that these laws are adhered to. Many of these laws also have penal provisions and non-compliance with the same, may land the founder in prison. We at LexStart have a dedicated legal compliance team and have handled compliances of many startups. In case you have any query, you can reach out to us at support@Lexstart.com.
5. Conflict with investors
The relationship between a startup and an investor starts at the initial pitch where each side looks to establish a long-term commitment. Such a relationship depends on trust, honesty and transparency. Unnecessary surprises in form of undisclosed or concealed facts, nasty exits, investors pulling out because the start-up is not performing, over-interference of the investor in the running of the company are some of the concerns which mar the relationship between an investor and founders.
How to Avoid the Same:
Having a well-defined term sheet with all terms laid out is the best way to avoid investor-founder disputes. Each party would know what they are getting into and the risks involved. Although it may be non-binding, a term sheet serves as a template for developing more detailed documents that are legally binding. It lessens the probability of a misunderstanding or unnecessary dispute. Terms such as company valuations, investments and the term for which an investor is required to remain vested are typically captured in a term sheet. Negotiating a term sheet the right way and setting the tone for a fruitful collaboration is essential to prevent future disputes.
To summarize, maintaining a healthy balance, and surrounding oneself with the right people, good homework coupled with effective skills (social and marketing) can help one be a successful business. We at LexStart understand the importance of setting up and growing a business. Hence, we offer a variety of services ranging from the drafting of agreements to legal compliance to early-stage start-ups. You can reach out to us at support@Lexstart.com.