Taking the leap and building a startup may be the most frightening thing most people will do. Even a slight misstep could lead to you becoming one of the 90% of startups that fail within the first five years. To help you avoid startup mistakes, we’ve compiled a list of the six most common mistakes startup founders make and how to avoid them.
Startup Mistake 6 – They Don’t Make a Profit
The primary goal of any business is to make money. Attracting millions of users with a great product is pointless if you don’t understand how to convince them to pay for what you’re offering.
While it is theoretically possible to use investment capital to scale quickly at a loss, as Uber and others have done, this only works to a point. You need to understand where your break-even point is, or your business will fail sooner or later.
This isn’t just us trying to scare you. 82% of startups fail, at least in part, due to cash flow problems. You also shouldn’t assume that you’ll be able to pull an Uber, and rely on venture capital to keep you afloat while taking billions in losses. Even getting funded can be challenging, and 27% of businesses claim that they are unable to get the funding that they need.
How to avoid this: Startup founders should build their financial models with that break-even point in mind. It will help you understand how you need to scale to start making money once you capture your target market. It’s also important to model for outcomes where you do, and don’t receive funding. The fact that you’re willing to push ahead without capital will show that you’re serious.
Startup Mistake 5 – They Position Themselves Poorly
Positioning is key. If a company fails to fit into its niche correctly, it is doomed to failure. One of the best examples of this is the co-working space startup WeWork. This company rented out high-end commercial properties to startups and freelancers with very flexible terms.
The problem? WeWork offered premium properties to an audience that only needed affordable, flexible working spaces. It meant that they were often unable to keep occupancy rates high enough and thus became saddled with many expensive leases. Ultimately, WeWork experienced a spectacular public downfall and still hasn’t recovered.
How to avoid this: Spend time understanding your target market. Focus on giving your customers what they actually need. If they don’t need a premium offering, don’t sell that to them.
Startup Mistake 4 – They Don’t Document Their Processes
One of the essential principles in business is the “Bus Factor“. It’s a risk profile that describes what happens when a key team member suddenly disappears from a project, and it can’t continue.
By their nature, startups are fluid, which means that a lot of knowledge becomes trapped in the heads of key team members. If that team member becomes unavailable, it is not uncommon for a startup to collapse completely.
How to avoid this: Start documenting everything from day one. Whether that’s through code comments, procedural documents, or just emails, you need everything on paper so that you can continue to build your business no matter what happens, there’s a pretty detailed guide available here.
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Startup Mistake 3 – They Can’t Scale
The biggest challenge that many startups face is scalability. Creating a unique product is one thing, but it’s quite another to onboard millions of new users. If you don’t build your product with scalability in mind, your startup has a hard cap on growth.
Additionally businesses need to understand when to scale. Premature scaling is the end of around 70% of startups. Even those that do scale often fail to do so well-enough, and are among the 20% that get outcompeted by their rivals.
How To Avoid this: For most tech startups, the best way to avoid this is to build on an infrastructure that is scalable by nature. The best example of this is Cloud Services. These enable startups to offload the infrastructure burden onto companies specializing in it, like AWS, and give them significantly more flexibility. You can read more about Cloud Services here.
Startup Mistake 2 – They Can’t Secure Funding
You might be comfortable putting money into your business, but convincing someone else to put money into it can be tricky. Often, great ideas fail to secure the funding they need and can’t get off the ground. It becomes particularly problematic for European startups, who lack access to late-stage capital sources compared to their American counterparts.
Funding is key for many businesses. Only 75% of startups backed by venture capital eventually fail, compared to 90% of startups more generally. Additionally, an injection of funding is often necessary for businesses, and 38% fail because they’ve run out of cash and can’t raise more.
How to avoid this: Consider alternative ways of funding, either in the form of government grants or programs like AWS Activate, which offers qualifying startups up to $100,000 in AWS credits to help them get their business off the ground. You can read more about this here.
Startup Mistake 1 – They Don’t Work With The Experts
Startup teams need to run lean, and this frequently means that they try to do everything in-house, even if they lack the expertise. Sometimes this leads to a loss of focus as founders attempt to learn everything from marketing to effective DevOps planning. These distractions can ultimately lead to a startup failing to capitalize on an opportunity and becoming irrelevant.
How to avoid this: By hiring outside companies specialized in specific operations, it is possible to keep your team lean while leveraging the experience of subject-matter experts. For example, the Cloudvisor team is an industry leader in implementing AWS cloud solutions, in a startup environment, freeing founders up to concentrate on what they do best.