startup failure

The Four Stages of Startup Failure (and how to avoid them)

Kurt GraverBusiness Start-up Advice

The vast majority of startups fail. According to CB Insights, Ninety-six per cent of them close within the first two years. So, why risk starting one?

There are a couple of reasons why people are willing to risk starting a startup despite the high likelihood of failure. 

First, starting a business is a rewarding experience. Even if the startup fails, the founder will learn much and be better equipped to start another company.

Second, the potential upside of a successful startup is massive. A small percentage of startups become huge successes, and the rewards for those that do are disproportionate to the risks.

While every startup journey is very different, most businesses will go through roughly the same phases as they grow and develop.

Understanding the typical phases a startup goes through can therefore be helpful when building your business plan. This is because you can prepare for what each stage has in store and adapt according to your business plans.

Here’s a summary of the five key startup stages and what you can do to graduate from each one successfully.

There are four main stages of startup development: The development stage, launch, scaleup and maturity. 

Stage 1: The Development Phase

This phase starts with an idea, which is where most businesses end. 

It’s one of the most dangerous stages because people often make mistakes that lead to failure. 

In this stage, startups often fail to validate their idea through market research or by testing their product with potential customers. This can lead to them developing a product that no one wants or doesn’t solve a real problem. 

The other issue in this phase is that entrepreneurs often fail to develop their product quickly enough or run out of money before their product is ready for launch. 

To avoid this, you need to have a clear development timeline and validate their idea early on by talking to potential customers and doing market research looking at the current market and how this may evolve.

Once you’ve decided on a product or service, you need to consider how you will fund the business in its early phase. This is called seed funding.  Most entrepreneurs fund this stage through their own savings, friends and family or take out a loan.

When you have completed your market research and raised enough funding to build your product/service, you need to create a Minimal Viable Product (MVP) to test your product/service.  

A minimum viable product, or MVP, is a product with enough features to attract early-adopter customers and validate a product idea early.  

Most startups don’t do this phase. They just dive in and launch the business fully.  There are three main problems with this approach.

  1. It takes too long to bring the full product to market, and other companies may have entered it.
  2. You may be wasting your time adding new features to your product/service which customers do not value, effectively wasting your time and money.
  3. It may be too expensive to launch the full product/service immediately.  It may be better to start small, get customer feedback and spend your money on features customers actually want

Stage 2: The Execution Phase

Once you’ve developed your MVP to a point where everything seems to work the way it should, it’s time to hit the market.

There’s a lot more to this than simply going out and selling. You need to work towards product-market fit, which means fine-tuning your product to meet the demands of your target market.

Achieving the ultimate product-market fit is an ongoing process which you’ll probably revisit time and again during the lifetime of your business. But it’s most intense in the early stages.

Commonly companies fail at this stage when the company fails to execute their plans or act upon the feedback from their customers.

A few things can be done to avoid this stage of failure. First, the company should have a clear plan, and all management team members should be aware of the plan. Second, the company should track its progress and ensure it is on track. 

Finally, the company should be flexible and be able to adapt to changes.

Stage 3: The Scaleup Phase

The Scaleup Phase is when a company has outgrown its startup phase and is now trying to scale up its operations to meet the demands of its growing customer base. Unfortunately, many companies fail to properly manage this transition and end up collapsing under the weight of their own growth.

It’s common for startups to try and scale before they’re ready, which is rarely a good idea. Trying to grow too fast, too soon can lead to burnout and wreak havoc with your brand image.

There are a few things to remember when trying to avoid this failure stage. Having a clear and concise business plan that outlines your goals and objectives is important. Secondly, you must ensure you have the right team to execute that plan. Finally, you must invest in infrastructure and resources to support your growth.

Stage 4: The Maturity Phase

If you’ve got an established foothold in the market, have a good customer retention rate, are influencing your industry and turning a profit, it’s a fairly good bet that you’re nearing maturity.

Depending on your ambitions, you might be considering exiting through acquisition or, if you’re thinking big, by listing on the public markets.

While everything may seem like it’s going well, it’s also a very dangerous stage for a company.  You don’t have a multinational’s cash reserves and financing, but you are no longer an agile startup that can pivot or develop new services as quickly as when you launched.

The business will have many more staff, costumes and assets to manage. Growth may start to slow at this time also. 

This inevitably leads to more regulation, compliance and procedures to manage the business effectively.  This will ultimately lead to more costs just to maintain your position in the market.

To avoid running out of cash and the business failing, you must keep the startup spirit in your business and set up your operations as efficiently as possible.

  • Never stop analysing feedback from your customers and adapting your product/service to their needs.
  • Pay attention to competitors and particularly new entrants to the market.
  • Invest continually in technology to improve your processes. 
  • Keep staff costs under control.

Conclusion

To avoid startup failure, it is important to have a clear vision for your startup and to be realistic about what it will take to achieve it. Make sure to put together a strong team of experienced professionals and have a detailed plan for how you will bring your product to market. Most importantly, don’t give up – remember that success is always possible, even if things get tough.

By understanding the stages of startup failure, you can avoid the pitfalls that lead to unsuccessful businesses.