Why Most eCommerce Startups Fail?

Unlike past 10 years nowadays one of the dream careers for college graduate is owning a start up. In the current breed of college graduate owning a start up will rank high along with rock star or film star. Though chances of earning a bread in start up businesses may be better than becoming a top rank actor or rock star but success rate is still low. This varies a bit from country to country both in quality of failure and magnitude of failure.

First few lines on history. Start up culture has been in existence since David took on Goliath and Goliath tasted dust but modern avatar of e commerce start up came up in USA. It is believed that Xerox corporation set up incubators that came up with technologies which were ahead of its time like Graphical User Interface (GUI). Like any big company it failed to cash it or monetize the technologies and failed as a company. But fire of start up culture had been lit. Same could be said of United States industrial military complex. Many time to produce armaments, rockets etc. Governments had to spend lot of money to come up with few lines of software or a software solution. Once rocket is sent or armaments produced the software becomes property of some geek or entrepreneur and start up takes birth. This happened more or less in case of Oracle. Lastly we all know that garages somehow spurn start up’s like HP, Apple etc.

These trends were noticed by few investors and that is how start up funding started. Later on this developed ecosystem of its own. Many governments realized that this start up ecosystem was proverbial sparrow that was holding the secret if not the lifeline of US tech giants. This lead to ‘me too’ government funded start up crazy initially in Korea, Singapore and now virtually in every country in the world.

Reasons Why Most Online Businesses Fail

But unfortunately, the fact is that like most small companies, most of the start ups fail. As per studies, 75 percent of venture-backed start ups fail. This statistic is based on a Harvard Business School study by Shikhar Ghosh. The key word here is venture-backed which means that these starts up had crossed the first hurdle of getting an investor.

A recent study, “Entrepreneurial India,” by the IBM Institute for Business Value and Oxford Economics found that 90% of Indian start ups fail within the first five years. It is believed that lack of innovation is the will be major determinant for success or failure of the start up in India. 77 per cent of venture capitalists surveyed believe that many Indian start-ups lack pioneering innovation based on new technologies or unique business models.

Based on general management principles, management in organization involves below four activities and normally in same sequence.

1. Planning
2. Organizing and Resourcing
3. Directing
4. Controlling and Feedback.

A start up is also an organization first may be nimble, mean and hungry but organization none the less. An e commerce start up, also has four stages –

1. Planning
2. Product development stage
3. Execution stage
4. Marketing, Controlling and Exit stage.

Below are the pitfalls that the start up have to avoid in order to survive in this highly competitive world of e commerce.

1. At Planning Stage

A. Know your customer: You won’t be able to persuade anyone that they want or need to buy what you’re offering unless you clearly understand what it is your customers really want. Thus a start up like any other business venture is trying to fulfill customer needs and wants and for which customer is willing to pay now or at future date or will compensating by enabling marketing revenue. In case of free services like Facebook or Gmail customers do not pay anything but the customer is willing to compensate by allowing information on searches and browsing habits to be used for targeted marketing in one way or another.

B. Building wrong product: Important thing is that all product are imperfect because there is always tension between what customer feels it is worth and what businesses would like to charge for it. At the end of the day the product should be able to achieve profitability while meeting customer expectation—bearing in mind that customers pay higher for a better customer service. Example being Friendster, MySpace etc that lost out to Facebook even though these sites had first mover advantage and considerable following. One of the reason for failure of these sites was page loading time. As these sites offered ability to upload music, songs etc it took more time for pages to load and they also did not had Facebook’s like button.

C. Business Model failure: Business model that do not have monetization plan and when it does exists it is insufficient and does not result in profitability plan. Normally if a start up is profitable then it can survive crucial first 5 to 10 years. Even when start ups are able to make money like any other business it needs to continue to reinvent itself with new products and acquiring market share. Examples being Yahoo and AOL these were fairly successful companies in its first 10 years but not so in next 10 years.

D. No market need: This is the biggest reason why start up fail. As per analysis of 101 start up postmortems this reason resulted in failure of 42 percent start ups. Despite all the talk of privacy there is very little uptake of paid email services by email service providers.

2. Product Development stage

A. User Interface (UI) / User Experience (UX) Issues:

Designing UI/UX is essentially a problem-solving approach specific to design, which involves assessing known aspects of a problem and identifying the more ambiguous or peripheral factors that contribute to the conditions of a problem. This contrasts with a more scientific approach where the concrete and known aspects are tested in order to arrive at a solution. Design Thinking is an iterative process in which knowledge is constantly being questioned and acquired so it can help us redefine a problem in an attempt to identify alternative strategies and solutions that might not be instantly apparent with our initial level of understanding. Failing fast in a test group and environment is the best way to achieve the required design for user interface and user experience (UI) and (UX).

Read the complete article on e-commerce website UI/UX design mistakes to avoid.

B. Mistakes Businesses make while Executing their Online Marketing Plan: Online marketing is a set of tools and methodologies used for promoting products and services through the internet. Online marketing includes a wider range of marketing elements than traditional business marketing due to the extra channels and marketing mechanisms available on the internet.

Read the complete article on Online Marketing mistakes and how to avoid them.

3. At Execution Stage

A. Poor management team – Negative traits that will likely mean a founder doesn’t get good results from employees:

1. Lacking a crystal-clear focus: – Very few managers use their time as effectively as they could. They think they’re attending to pressing matters, but they are really just spinning the wheels. Focused managers aren’t reactive, they have a laser-like focus to see a task through.
2. Lacking organisation: – It is knowing how to run the show in such a way that nothing can be out of sync and your team is not confused about what they should be doing. Delegating is to hand over the ownership of a project completely. If you hold on to some of the work, it can create confusion as to who is responsible for what and thus lead to lack of accountability. When team members feel they have full ownership of a project, they work harder towards making it a success.
3. Not clearing Organizational debt from time to time: – Organizational debt is all the people/culture compromises made to ‘just get it done’ in the early stages of a start up. Just when things should be going great, organisational debt can turn a growing company into a chaotic nightmare. So look back from time to time to clear Organizational debt
4. Lacking attention to detail during the hiring process: – Hiring the right people when you are starting out in business can make or break the company- if the sales executive can’t hit the target, if the marketing manager’s campaigns have no impact, then all you have is a salary to pay and no return on that investment. The money pit from a bad hire gets deeper and deeper with each moment that person is in the role due to the cost of all the opportunities they miss and mistakes they make.
5. Hire employees who’ve worked with startups before or are keen to work in a start up: – If your start up unit can function and deliver on a shoestring budget, you’ve got a winning team. The reason it is always a better idea to hire individuals who have previous startup experience is that they can make a business grow organically by using budgeted marketing techniques like social media and SEO. If they only know how to work with big brands and big budgets, they will constantly find excuses to not get work done.

B. Running out of Cash: It is estimated between 70 and 75 percent of venture-backed startups don’t return the money investors put in – and of those, more than half return nothing. Venture capital database CB insights tracked more than 1,000 startups that raised seed rounds in 2009 and 2010, and found that by the end of 2015, less than half secured a second round of funding. Just 22 percent achieved a sale or IPO, and 1 percent reached a value of $1 billion.

“Despite the fact that cash is the lifeblood of a business — the fuel that keeps the engine running — most business owners don’t truly have a handle on their cash flow,” says Philip Campbell, a CPA and former CFO, author of Never Run Out of Cash. “Poor cash-flow management is causing more business failures today than ever before.”

Tips to help put your business on the path to successful growth financially.

1. Your first priority should be spend control
2. Rainy day reserves are always a good idea
3. Get help managing money
4. Keep your spend priorities straight
5. Get money you have owed as soon as possible

C. No cash flow: Profit does not equate cash flow. You can’t just look at your profit and loss (P&L) and get a grip on your cash flow. Many other financial figures factor into your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and debt service.

“There is a secret that very few business owners have discovered (and the accounting community has not done a good job revealing), knowing whether you earned a profit (or created a loss) is not the same as knowing what happened to your cash,”says Campbell.”

Profit, as defined by the rules of accounting, is simply revenue minus expenses. Invoicing a customer for products or services you sold to them creates revenue. Actually collecting the money on that invoice is what creates cash.

A positive cash flow is needed to generate profits. You need enough cash to pay your employees and suppliers so that you can make goods/deliver the service. Its the sale of those goods/services that help generate a profit. You need to structure your business to have a positive cash flow to allow your company to grow and increase profits.

D. Poor Inventory Management: A lack of inventory balance makes product shortages and overstocking unavoidable. Valuable time and human capital is being spent completing tasks a system could manage. When you lack the fluidity an inventory management system introduces your space becomes cluttered and difficult to effectively work in.

Remember that most of the successful start ups do not have an inventory. Ola does not own taxis, BnB does not own hotels and Ali Baba does not keep product inventory. In businesses where inventory is needed then just in time system of inventory with high accuracy is better than most systems unless business model or logic dictates otherwise.

E. Too Much Competition: If a startup does not know its competition and what they are up against, then they will eventually find themselves in hot water. 19 percent of start ups told CB Insights that not taking competition seriously led to their demise.

The chances of your venture getting out-competed by the others in the market is very high. Competitors that are also playing in the same field as yours will not give up easily. A combination of factors such as expertise, product and funding can lead to one start ups success and the others loss.

F. Product Problems: Its vital that your process delivers a solution that solves the problem. Features that enhance this solution are welcome but if you don’t solve the problem – the whole product is fluff nothing more. It’s important to remember that while Interaction Design and Visual Design can build something beautiful – it’s wasted without the product being useful.

It is best to run problems against the basic product vision or objective.

This product is for: (Your Audience) It will help them solve this problem: (The Problem) We will do this by: (The Strategy) We expect a working product to: (The Objective)

Once you have done this definition – you can move on to deciding on how to solve the problem or adding or changing a feature.

G. Market Problems: Market problems are your target market’s stated or silent problems. This could refer to existing inefficiencies, awkward workflows or non-optimal solutions. The key to finding a market problem is to listen for frustrations, or “if only” statements, that arise during interviews.

In the startup industry, you will discover that not only your company’s direction and vision might be changing constantly along the way, but the market as well will be introducing new opportunities and threats all the time.

4. Marketing, Controlling and Exit Stage

A. Poor Marketing: One of the most important elements of a successful business plan is a well-researched marketing plan. It starts with the market feedback and competitive analysis. Once you have a clearly defined target customer, you need to design a marketing campaign that turns him or her into a paying customer.

Unlike brick and mortar business in start up world it starts by creating your prototype or concept, getting a small number of people to love the idea of your product, having them try your product, having them decide they need your product, and finally, developing marketing plan around your product.

B. Disharmony among team and investors: CB Insights’ list of 20 reasons why startups fail ranks disharmony in a founding team or between the founding team and investors as the 10th most common reason start ups fail.

Tension and conflict are important features in dynamic, successful businesses. But if unresolved, this discord can lead to slower decision making, frustration born from shifting priorities and direction, and reduced staff commitment and performance.

If a venture is performing well, issues may be pushed into the background, sometimes for many years, until a reputational or liquidity event brings it to the fore. Thus these types of issues happen more often when start up is thinking of tie-ups, exiting business or has stabilized and control issues need to be sorted out.

The sorts of issues that can create tension between founders include equity split, reliance on the venture to provide income to live, the split between external and operationally focused roles, decision-making processes, incompatible styles, values or personalities, and the perceived level of contribution and commitment to the venture.

C. Ignore customers: Once start up is self-sustaining or has stabilized its business model and has secured venture funds for growth and contingencies, it has been seen that startup may get too caught with technology or stock market valuations and ignore customers in the process.

When you don’t validate your market aggressively enough, you can’t build a good product. Without measuring, trusting the numbers, tracking, validating, and optimizing the data you get from your clients, it’s not possible to create a viable product or do viable and customer-centric updates again and again..

For instance, eCrowds, a web content management system company, said, “We spent way too much time building it for ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.”

Similarly, VoterTide wrote, “We didn’t spend enough time talking with customers and were rolling out features that I thought were great, but we didn’t gather enough input from clients. We didn’t realize it until it was too late. It’s easy to get tricked into thinking your thing is cool. You have to pay attention to your customers and adapt to their needs.”