- July 28, 2022
- Posted by: Ramkumar
- Category: Posts
Why do Many Start-Ups Shut Down
Post covid, many firms, especially tech startups, scaled their customers, users and employees, but many start-ups struggle to sustain themselves with the current inflationary environment. Although founders attribute it to a higher cost of capital, I believe the problem lies in the issues with their fundamental business models.
First, not all start-ups are struggling. 𝐖𝐡𝐞𝐧 𝐢 𝐚𝐧𝐚𝐥𝐲𝐬𝐞𝐝 𝟐𝟕𝟓 𝐬𝐭𝐚𝐫𝐭-𝐮𝐩𝐬 𝐢𝐧 𝐈𝐧𝐝𝐢𝐚 𝐛𝐲 𝐧𝐨 𝐨𝐟 𝐮𝐬𝐞𝐫𝐬, 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐞𝐬, 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬 𝐚𝐧𝐝 𝐫𝐞𝐯𝐞𝐧𝐮𝐞𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐥𝐚𝐬𝐭 𝐭𝐡𝐫𝐞𝐞 𝐲𝐞𝐚𝐫𝐬, i found:
1)Start-ups that 𝐠𝐫𝐨𝐰 𝐮𝐬𝐞𝐫𝐬, 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬 𝐚𝐧𝐝 𝐫𝐞𝐯𝐞𝐧𝐮𝐞𝐬 𝐟𝐚𝐬𝐭𝐞𝐫 𝐭𝐡𝐚𝐧 𝐭𝐡𝐞 𝐧𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐞𝐬 are profitable and do not rely on external funding.
2)Start-ups where 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐞𝐬 𝐠𝐫𝐨𝐰 𝐟𝐚𝐬𝐭𝐞𝐫 𝐭𝐡𝐚𝐧 𝐮𝐬𝐞𝐫𝐬, 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬 𝐚𝐧𝐝 𝐫𝐞𝐯𝐞𝐧𝐮𝐞𝐬 𝐡𝐚𝐯𝐞 𝐫𝐞𝐬𝐨𝐫𝐭𝐞𝐝 𝐭𝐨 𝐥𝐚𝐲𝐨𝐟𝐟𝐬 and cost-cutting. These start-ups have issues with their fundamental business model, making me question how they received funding in the first place.
3)Many start-ups that struggle focus on the technology, the product and design but miss 𝐡𝐨𝐰 𝐭𝐨 𝐦𝐚𝐤𝐞 𝐦𝐨𝐧𝐞𝐲 𝐛𝐲 𝐚𝐜𝐪𝐮𝐢𝐫𝐢𝐧𝐠 𝐚𝐧𝐝 𝐬𝐞𝐫𝐯𝐢𝐧𝐠 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬.
My insights after completing this study:
1)𝐓𝐞𝐜𝐡𝐧𝐨𝐥𝐨𝐠𝐲 𝐢𝐬 𝐧𝐨𝐭 𝐚 𝐝𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐭𝐢𝐚𝐭𝐨𝐫 in this digital world. However, figuring out the right combination of services to package a breakthrough product is a differentiator.
2)𝐁𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐦𝐨𝐝𝐞𝐥 𝐢𝐧𝐧𝐨𝐯𝐚𝐭𝐢𝐨𝐧 𝐢𝐬 𝐜𝐫𝐢𝐭𝐢𝐜𝐚𝐥 for any start-up to disrupt. Once the start-up becomes a profitable unicorn, technology innovation helps retain the gains allowing them to exit existing markets/enter new markets.
For instance, Uber’s biggest rival is not Ola in India but autonomous vehicles, which can obsolete Uber’s network of drivers.