Why Some Business Fail
I realised that the reason why some startups fail is because they are bad ideas. That’s a given. Then why do some startups fail and others succeed?
The answer is simple: starting any business requires hard work and dedication, but there’s a difference in the amount of hard work required depending on the type of business you are doing.
Let’s look at an example: we can all agree that being a doctor or a lawyer requires way more effort than being a salesperson or salesman (even though the latter might make more money). So, what makes one type of business harder to start than another?
If you ask me, I can give you two reasons:
competition and scalability.
You see most people don’t like talking about competition but this subject is crucial for your success as a startup.
What makes some businesses more competitive than others? In my opinion there are three main reasons for this:
product differentiation, customer acquisition and resources (i.e., capital).
Let me explain each one of them:
When there is no product differentiation, it means that your competitors can copy your product or service with very little effort; therefore making it easier for them to enter the market and compete with you.
The best example of product differentiation I know is Facebook vs MySpace. Facebook was able to become so big because it was able to differentiate itself from MySpace by adding features that users wanted (Facebook Connect) and by offering better solutions for advertisers (like Facebook advertising).
This is closely related to product differentiation; however it focuses on how easy it is for customers to switch from one competitor to another; in other words how many customers are lost when a competitor enters the market?
It all depends on how easy it is for them to learn about other products or services offered by your competitors; if they have easy access to information about other companies offering similar products or services then customers will be less likely to stick with your company when new competitors enter the market.
A good example of this is Google vs Yandex in Russia; Yandex holds 93% market share in Russia while Google has only 7% share thanks to its decision not to invest in localising its search engine into Russian (which would have been easier if Google had been willing).
Resources (i.e., capital)
This is the most important factor in my opinion; it is directly related to both product differentiation and customer acquisition. When you don’t have enough resources, i.e., capital, it becomes impossible for your business to flourish; you can’t compete with larger companies that have the resources to invest in marketing strategies, product development and/or research and development.
This is exactly why startups fail when they try to compete with bigger companies that have much more resources at their disposal.
This doesn’t mean that if you have a great idea you can’t become successful; but I believe there are some types of businesses that are easier to start than others.
For example, if you have an idea for a business that requires little or no investment such as creating a simple web site or designing a logo then it will be easier for you to enter the market than if you had an idea for a business that requires substantial funding such as creating a new device or software solution.
If we take into account the factors mentioned above, then it becomes obvious why some businesses are harder to start than others:
When your business doesn’t differentiate itself from competitors by offering something unique (in terms of product or service) and customers are going to be easily attracted by competitors then your chances of success are very slim because competitors will be able to copy your product or service at very little cost.
Even if all these conditions were met, there would still be another obstacle:
Competition matters because companies with more resources at their disposal usually win over startups because they can spend more on marketing strategies and product development while startups usually don’t have enough capital for this type of investment.
Finally there is one more thing that makes it harder to succeed as an entrepreneur: there are some businesses whose products or services require large investments which means startup founders must invest significant amounts of time and money in order to succeed but startups usually lack this type of monetary support so they end up failing before even getting started.
I’ll give you one more example: a friend of mine recently started a business by selling handmade stuff. This is a great idea for two reasons: first, it’s easy to start because there is very little investment required; second, if she succeeds, she can easily increase her business by either hiring people to help with production or by outsourcing this task.
I would have been very happy for her if her only problem was finding the right product but unfortunately that’s not the case: it seems that she has some kind of problem with competition because she says that other companies are copying her designs and selling them for less money; even though I don’t know all the details I would really like to know how you fight with competitors like these?
If this was the only problem, this could have been solved easily but there are other factors involved in this story; namely scalability.
You see with this type of business you can sell as much as you want and as long as people keep buying your products then everything will be fine; however if competition is tough and there is no differentiation then your chances of success are very slim because you can’t easily solve this problem by investing more in marketing strategies or by increasing production.
I hope I have convinced you that some businesses are harder to start than others; now my question is: what kind of business should you choose? You see, it all depends on your risk appetite; if you want to start a business but don’t have enough investment capital (i.e., access to cash) then I think you should look for a niche that requires little investment, such as designing websites or logos.
If you feel confident enough and have access to some capital then I would suggest looking for a niche that differentiates itself from competitors by offering something unique and doesn’t require a lot of resources.
If this doesn’t sound like something you are willing to do then I suggest creating an idea that requires less investment such as writing articles or selling handmade stuff or digital products (such as eBooks) because there is very little capital needed for this type of business.
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.