Major Causes of Startups Failure

by Atiq ur Rehman

The world has experienced a wave of startups in many countries, in recent years, in a bid to unlock the trapped potential of youth, create employment opportunities, promote innovations, enhance productivity, improve the livelihood of the people and boost economic development.

What is a startup? The Investopedia, an online business dictionary, defines a startup as “a company that is in the first stage of its operations”. Generally, a startup company is equated with a new information technology (IT) company and rightly so; the world of startups is dominated by tech-companies. However, it is not necessary that all startups are tech companies. They may have non-tech products, too. A startup management is just like launching and managing a new small enterprise.

Governments of many countries are investing considerable effort to promote the culture of startups. This culture refers to support services and the facilitative environment provided by the different actors (especially the government agencies and the academia) to help new idea owners in refining and implementing their business ideas to solve any social or economic problem.

Startups aim at solving specific problems or boosting the efficiency of the existing services; hence, in a way, they are actually intended to catalyze the process of outcome management through striving to achieve higher levels of productivity and efficiency powered with technology.

The bad news is that high mortality rates of startups are reported from different parts of the world. It is increasingly becoming a serious concern that only a small percentage of startups manages to survive and grow.

Startup owners are usually inexperienced business persons. In a highly competitive environment, they face serious challenges in accessing financial resources, controlling development and operational costs and marketing their services. Many of them also do not have access to mentoring or coaching support.

Failure is also bad because it discourages other aspiring people to venture. These issues are deeply rooted in the weak or poorly developed ecosystems for the startups.

Hence, there is an urgent need for governments to intervene to strengthen the creation and development of a startup culture. Before we discuss the elements of such a culture, let us briefly talk about the symptoms of weak startups culture and causes of their failure.

Major symptoms of weak startups ecosystems are:

  • A high failure rate. (Henry, 2017). Patel (2015) says 90% of startups fail.
  • low entrepreneurial intention (EI) among students with professional degrees  (such as business administration, information communication technology, engineering etc.). Intention is defined as, “the psychological “process, state, or act of conscious willing in the present to make some experience be true, realized, manifested, or created in the future” (Bird, 2015). Hence, EI refers to the motivation of an individual to launch or acquire and manage a business.
  • Low scoring on ease of doing business.

The underlying causes are:

  • Inefficient and ineffective market information system– Valid, reliable and timely information empowers those who hold it. New startups face immense difficulties in finding valid and reliable market information. More worrisome is that in many cases, many startup owners are not aware of the type of information that is required for making sound business decisions. At times, they are overwhelmed with the business idea to such an extent that they totally overlook the need to conduct market research. They believe that their assumptions about the market conditions are accurate and realistic, while in reality they are not.
  • Restrictions and barriers on new entrants into a specific industry. In some cases, some of the powerful existing businesses manage to control supply chains to gain a clear competitive advantage of the market. On the other hand, new entrants find it so hard to develop viable supply chains that their entire business ideas turn out to be totally non-feasible. For example, Uber, Grab and Cream faced such resistance from local can owners in many markets. However, if strategic alignment between a startup’s idea and the market needs is string, then it will not be hard for the startup to get entry.
  • Ineffective networking forums: Capacity constraints always impede the way of startup owners. However, effective social and business networking can help in bridging this gap. A study by the Economist Intelligence Unit (EIU) conducted in 2016 found that “informal entrepreneur communities are instrumental to start-up success in several world cities that are known for their nurturing of innovation”.Networking provides necessary resources (knowledge, skills, technology, finances, etc.) needed to create and execute business plans.
  • Cultural issues:Nassar & Sori (2017) have highlighted that collectivist culture is an impediment to innovation. What is a collectivist culture? According to Hofstede (1984) “Collectivism stands for a preference for a tightly knit social framework in which individuals can expect their relatives, clan, or other in-group to look after them in exchange for unquestioning loyalty….I relates to people’s self-concept: ‘I’ or ‘we.’ ”. All eastern countries (especially low-income countries)  generally have a collectivist culture while all western countries (especially high income countries) have individualistic culture on overall basis. Individualistic culture is opposite to the collectivist culture. Collectivist culture is considered to be an impediment because in such cultures individuals heavily rely on family and other supports. Besides, it is also likely that other cultural dimensions such as Uncertainty Avoidance Index (UAI) and Long Term Orientation Index (LOI) may also have a profound effect on EI. High UAI and low LOI values might impede the startup culture development. Laura, Dale & Speece (1993) state that UAI is a measure of “society’s tolerance of ambiguity and uncertainty”. Successful entrepreneurs are usually risk takers. UAI culture suppresses risk-taking attitudes and abilities of the individuals. In high LOI cultures, people tend to save more money for more secure future. Hence, in such cultures, startup owners face fewer difficulties in mobilizing financial resources.

The good news is that some countries have demonstrated success in developing a good startup culture. Malaysia is one of them. It has managed to develop an effective business ecosystem for startups. The Malaysian experience offers valuable insights for other countries to learn.

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