Why startups fail? Investigating the role of market problems

There are several common reasons why startups fail. In this article, I would like to highlight one of the most important issues: market problems when there is no compelling value proposition, or compelling event, to stimulate the buyer to actually commit to purchasing. According to Tony Robbins, the bigger a problem you solve, the more likely you can build a successful growing business.

Good salesmen will tell you to get an order in today’s tough conditions, you have to find buyers that are “in extreme pain”.   You have probably heard the vitamin versus aspirin metaphor – a vitamin (nice to have), or an aspirin (must have).

The second common market problem is when market size of people that have pain, and have funds is simply not large enough or the market is saturated. In this case, there is tough competition among current incumbents to gain market share, which is limited, something characterized by consultants and researchers as “red oceans”.

Related:Five factors you should consider before choosing the business location

Another problem could be that the market timing is wrong. You could be ahead of your market by a few years, and they are not ready for your particular solution at this stage.

For example when EqualLogic first launched their product, iSCSI was still very early, and it needed the arrival of VMWare which required a storage area network to do VMotion to really kick their market into gear. Fortunately, in this case, they had the funding to last through the early years but not all entrepreneurs are equally fortunate to have money for keeping them alive.

But why do entrepreneurs make such fatal market mistakes? One reason is according to Foo in a 2009 paper, the emotional attachment to the business and product that entrepreneurs normally have. Emotional attachment makes entrepreneurs biased toward the opportunity they found and harden to have an objective evaluation of the market and the opportunity.

Asymmetric information is another reason. Entrepreneurs as new comers may not know every aspect of the market as much as managers with over 20 years experience do. In fact, startups are not centrally positioned in the network of firms in the market so they get key information often later than established firms (or perhaps never).

Miscalculations and jumping into conclusions are another critical issue. Observations show that entrants often underestimate the intensity of competition and over-estimate their knowledge and abilities. This can easily lead to poor judgment of market conditions.

But what should entrepreneurs do to avoid market problems?

related: conquering fear of failure to embrace entrepreneurship

Entrepreneurs should understand how their sub-conscious works when they are on the verge of taking decisions. According to Robert Kiyosaki “Your “little voice” is the subconscious part of your brain that talks to you. Control that voice and your emotional and intellectual strength makes you unstoppable.”

Another important task of entrepreneurs is that they should collect enough information and insights before entering a new market. Although it would be difficult to master “rules of the game”, entrepreneurs are ought to strive for it. It is absolutely crucial to be unbiased toward signals new comers receive from the market before they make decisions.

Lastly, entrepreneurs are  advised to consult with experts and external parties before taking strategic decisions. These experts are, unlike entrepreneurs, not emotionally attached to the business idea and may be able to see aspects of business that entrepreneurs cannot.

About pourya

I am an entrepreneurship postdoctoral research fellow at Tilburg University in the Netherlands. My vision is to fill the gap between entrepreneurship research and practice with this website. Research and practice are two separate islands when it comes particularly to entrepreneurship. There are hundreds of papers/articles written every month but we hardly see their contribution to real life entrepreneurship.

6 comments on “Why startups fail? Investigating the role of market problems

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