What are the biggest challenges for startups?

Ewa Rutczyńska-Jamróz
26 August 2022
10 min read

Each year, over 300 million startups are created (Get2Growth). However, 90% of them fail (CB Insights) - and for numerous reasons. Securing funding and no market demand are among the main ones. And there are many others. What's more, these reasons will differ according to what stage of business growth a startup is at.

In this blog post, we'll have a closer look at some of the challenges that explain the reasons for this failure rate, and, more importantly, consider what a startup can do to overcome such challenges.

Tech startups stages

Before having an initial overview of a startup's bigger challenges, let's clarify what the key stages of a startup lifecycle are. Here, we'll focus on its 3 initial stages and on the unique challenges encountered in each.

Pre-seed: validate the business idea

This is where the startup journey begins. A startup founder has a business idea and wants to build a unicorn based on it. Here, the founder's main tasks will be to:

  • validate the business idea with real users;

  • prepare a business plan;

  • build a business model;

  • analyze the competition;

  • define target audience and personas;

  • build a prototype;

  • prepare a pitch deck for investors.

The objective, then, is to confirm that the business idea fulfills a genuine market requirement. Validating the concept and certain business hypotheses in real market conditions both take time but are worth it. Activities like desk research on competitors, in-depth user interviews and testing prototypes bring valuable feedback which may significantly increase the chances of success.

Seed: gain traction

A critical step toward this stage is by ensuring that the business idea makes sense. A startup founder must be sure that the problem he/she wants to solve does exist and that the proposed solution meets the true needs of end-users.

If so, then it's time to start building traction. And the best, most effective way to do this is by building a minimum viable product (MVP).

An MVP is something between a prototype and the final product. It’s a clickable version of the product with a proper UX/UI design and based on feature prioritization. It's still not a final version of the product but is ready to be released publicly and tested with real users.

This is the best way to get feedback, check what works and what doesn't work for the users, and verify product usability. This establishes a solid foundation upon which to build the next iterations of the product.

From the market perspective, this process facilitates continuous product improvement until the final version is ready to launch. Here, being open to pivoting your business is key.

The development of MVP is the smartest way to create the best solution in the shortest period of time. It helps to optimize resources, stay ahead of the competition, and get some traction to share with investors in the process of securing funding.

At the pre-seed stage, startup founders will often use a bootstrapping funding strategy. This typically means allocating personal savings and/or resources from friends and family.

However, the requirement for investor funding will at some point be inevitable. So, one of the biggest challenges at this stage is knowing when and how much will be needed to ensure liquidity.

Learn more about MVPs from our blog posts -> What is a minimum viable product and how is it built?

Series A: win customer trust

A startup now has a vision of the final product in place. An MVP has been validated with real users and seed funding acquired. The priority now is profitability.

It’s time to fulfill the provisions of the investment agreement as related to the final product development, team-building, sales growth, customer base development and securing cash flow.

A management team is in the investors' loop and is therefore subject to increasing expectations of delivering KPIs. And when expectations are unrealistic, problems occur.

However, if sufficient homework has been done in previous stages (i.e. a startup company validated the business idea validation, MVP development etc.), the probability of success is higher. In such a case, the biggest challenge a startup faces is hiring the right employees for the job to ensure the capacity to scale.

At Startup Development House we turn ideas into successful digital products. We understand the challenges of tech startups as we face them together with our clients on daily basis. We also know that the first stages of the startup lifecycle are crucial to gaining market share and winning customers' trust.

We began our investigation with an overview of the business growth stages. This is because when searching for statistics on how many startups survive, we found that 9 out of 10 startups fail (as cited above) and therefore needed to know why they were failing. Now we need to know when these failures are occurring.

According to Failory, 10% fail during the first year and 70% during years through two to five. This confirms just how crucial the initial 3 phases are to any startup's success.

5 biggest challenges faced by tech startups

Once we recognize the different challenges that appear at different stages of business growth, we need to take a closer look at how to manage them.

No 1: Securing funding

According to CB Insights, 38% of startups end because they ran out of money or failed to raise new capital. This reason can be seen from two sides.

The first, that the failure is the result of the ineffective management of funds by startup founders. Building a startup takes extraordinary discipline. All expenses must be well planned.

The second, that there is no knowledge of how much funding is needed and when. Which is just as important. Talking to investors is an ongoing process and requires thorough preparation. Before investors decide to put their trust and money in founders, they need full confidence in the business idea.

To instill this confidence, you need solid market validation. Results of in-depth user interviews, prototype and/or MVP testing, competition research, and personas' profiles - all will work to your advantage.

Overcome this challenge by:

  • validating the business idea in real market conditions;

  • defining a target audience;

  • asking real users for their opinions;

  • preparing a solid pitch deck and supportive documentation, including a business model and financial projections.

Learn more about fundraising from our blog post -> How to get funding for a startup? 

No 2: Product-market fit

According to CB Insights, 35% of startups end as a result of no market need for the product. Unfortunately, it's still very common for startup founders to be sufficiently preoccupied with their ideas that they will seek to implement them at any cost. Fatally, they overlook asking users their opinions of these ideas.

Needless to say, if we expect customers to pay for the product, we must ensure it meets their needs. Should that product be developed in isolation from market realities, success is unlikely.

This is why business idea validation and conducting in-depth user interviews are so important. Without them, a startup founder may spend many months and much money in pursuit of nothing to monetize. And when external funding is involved, things can soon get complicated.

Overcome this challenge by:

  • validating the business idea in the real market conditions;

  • defining target audience;

  • defining value proposition;

  • developing an MVP;

  • conducting user testing.

Learn more from our blog post - > How to find product-market fit?

No 3: Competition

According to CB Insights, 20% of startups end simply by being eclipsed by the competition. How does this happen? Usually, because a startup founder didn't do his or her homework.

Successful businesses must be acutely aware of what solutions already exist on the market as a guide to building a value proposition based on unique features. In the case of a tech startup, this could be by choosing the right technology, being mindful of its usability or improving the effectiveness of certain processes.

Competition analysis is not a one-off obligation, but an ongoing one. A successful business is typically one that is open and ready to pivot according to changing market needs.

Therefore, it is crucial to keep competitors in the loop -- particularly for a startup that operates in online businesses. Competition here is more fierce than when compared to traditional businesses.

Overcome this challenge by:

  • performing market and competition analysis;

  • defying value proposition and competitive advantages;

  • developing an MVP and improving the final product based on the received feedback;

  • starting building a loyal customer base as soon as possible (along with MVP testing).

(Things can go differently, however, should you decide to build your startup using the blue ocean strategy, thus making your competitors irrelevant. Learn more from our blog post -> What is Blue Ocean Strategy?)

No 4: Team and company culture

Building an organizational structure that is ready to scale is one of the biggest challenges most startups will face. And that challenge simply is: who to hire, for what role, and when. In this area, it's helpful to have high but controlled expectations.

Entrepreneurs in small business startups need employees not only with suitable skills but also with passion for and commitment to building something great together. Recruiting initial employees who share common values results in an engaging company culture that potential future hires will find more attractive.

Founders also need a reasonable hiring plan. At once, they must ensure the right employees cover all key areas and stay focused on marketing and sales whilst taking care not to hire new staff too quickly and thus run out of money.

Outsourcing some of these functions can be an ideal solution to this challenge. Should a startup need to find the right people on time, it may search for that team externally. This can be a great option not just for accounting and marketing, but also for product development.

Overcome this challenge by:

  • preparing a reasonable hiring plan;

  • creating foundations for a startup's culture (mission, values);

  • making sure that the startup's culture is understood and respected;

  • onboarding for new hires;

  • outsourcing certain tasks.

No 5: Poor product

When considering the fierce competition and increasing expectations, winning the trust of customers is a daunting proposition. But a good product will make this infinitely easier.

What is a good product? A good product solves a genuine problem and is easy and pleasant to use. A good product is attractively designed.

The development of such a product requires numerous competencies starting with front- and back-end developers through to quality assurance specialists, UX and UI designers. For small business startups, the real challenge having them all. Yet overlooking any can be perilous.

Great products are not so simply made. Before an experienced team sets to work, it is highly advised that the business hypotheses be checked with real users. Again, by providing valuable insights and data, a minimum viable product can accelerate this process considerably.

Overcome this challenge by:

  • validating the business idea with real users;

  • developing an MVP;

  • hiring or outsourcing a full development team with adequate experience and skills.

Startup challenges: summary

Starting and scaling a company is an exciting, challenging journey. But entrepreneurs must be prepared to face obstacles in numerous areas of doing business. Knowledge of the most common reasons startups fail can help implement the right strategy for getting past these obstacles.

At Startup Development House we've helped develop more than 70 digital products for startups. Based on this experience, we've found that the best way to begin implementing the right strategy is by focusing on 3 key areas:

  1. Idea validation

  2. MVP development

  3. Competent development team

On these 3 pillars, we've built our services portfolio for startups at the pre-seed, seed, and Series A stages. A services portfolio for leveraging growth potential and minimizing risk.

If you're a tech startup and identify with any of the challenges above, contact us and we'll be happy to advise on how you can best rise to them.

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