Editor’s note: This article was first published in October 2017. The Clinkle story refers to its record $25 million seed round in 2013, when Lucas Duplan was 22; the article does not say what became of the company. The remark that Amazon is today one of the companies with the most potential reflects 2017.
Dozens of new internet businesses are created every day, so over a year there are thousands of companies hoping to become the next Facebook, WhatsApp or Instagram. But only a few manage to become profitable businesses in the long run, and certainly only a handful of “black swans” ever get listed on a stock index and become the next Google or Amazon.
However, even if our goal isn’t to create the next Google, and we’re simply looking for a way to generate income that scales over time, reaching hundreds of thousands or millions of euros a year in revenue, these would be some of the reasons why these business ideas end up failing.
First of all, as a general rule, the talent behind this kind of business idea tends to be young talent, with all the good and bad that comes with being young. So when the idea starts to become a real possibility of turning into a highly profitable business, that’s when the “big brothers” have to step in: the investors who finance the idea.
Here it’s worth recalling the case of Clinkle, whose founder was 22 and had a project on his hands that promised to revolutionise mobile payments. So much so that it broke a record in a funding round, raising as much as 25 million dollars from investors who didn’t want to miss out on an idea that promised to transform the future of payments.
Lucas Duplan, the entrepreneur behind Clinkle, could now forget about one of the biggest problems entrepreneurs face, and usually their biggest complaint: lack of funding.
What happens when you put 25 million dollars in the hands of a team of talented young people? They relax, to the point that investors became worried when they saw certain photos of the Clinkle team in which they were literally drinking those millions away with all kinds of excesses.
The investors went from believing they had climbed on board the technology that would change the world to thinking they had invested in something that was drifting off course, all because they had solved the team’s lack-of-funds problem for them.
See also: 20 original internet business ideas that work in other countries
It has always been said that when an entrepreneur lacks resources, they use their creativity. When you give them all the money they need and more, that creativity shrinks, and they start making decisions that can drag the company over the edge.
That said, one of the reasons many startups probably fail is that, when it comes to the crunch, they run out of funds to keep the business going until it finally takes off.
Why do most internet businesses fail?
See also: How this 25-year-old mother makes money from home with Facebook
People aren’t willing to pay for your product
Many companies take off thanks to the “freemium” business model, that is, apps that offer us something for free, which is why thousands or millions of people sign up. But the only way to generate revenue with the freemium business model is through advertising, and advertising isn’t always enough to cover the company’s costs and pay salaries.
That’s when the company needs the premium model, which improves on the freemium service in exchange for a payment or a fee. Many of these companies discover that users enjoy the free version but aren’t willing to pay fees. In other words, the service we offer isn’t attractive enough for customers to consider paying a fee to use it.
That’s why, before investing in a business idea, you have to put it to the test and face it with the market to see what the market has to say.
When it comes to selling a product, before going all in and ordering thousands of units to be manufactured, we should test the market with a few units. If selling those few units is a real struggle, one of these two things is probably happening:
- You’re getting your marketing strategy or product presentation wrong, or the price may be too high.
- The market isn’t interested in your product.
See also: Tips for starting a business from home without failing in the attempt
The product is too innovative
The dot-com bubble showed that you can have innovative ideas while the market still isn’t ready for them. In fact, the market wasn’t yet ready for companies like Amazon, which today is one of the companies with the most potential.
Steve Jobs used to say that people don’t know what they want until you show it to them. That message worked well for Steve Jobs, but let’s be realistic: you are very probably not Steve Jobs. So the most valid advice you can give an entrepreneur is not to create demand but to satisfy existing demand.
In other words, don’t try to build a business at the start around an idea nobody has come up with yet, because you’ll very probably spend more time trying to convince people to buy into your idea than working on making money from it.
Focus on improving products or services that have already shown there’s a market interested in them. When you’re featured in Forbes magazine, then you can announce that you have a super-innovative idea that will change the world. And then people will very probably buy into it.
Focusing only on money
Money is obviously important. If no money comes into our company, we could be closing tomorrow. But your company, your team and your vision should be more focused on adding value and meeting a need than on making money. If you offer value and meet a need, people will clearly be willing to pay for what you offer. And they’ll do it gladly.
Blinding, excessive motivation
You have to be motivated, you have to insist and persist, and you mustn’t take no for an answer. But sometimes excessive motivation leads entrepreneurs into mistakes. One of them is not closing the company quickly, before piling up more losses, and starting another business idea.
Especially in the Spanish-speaking market, failure is frowned upon, so we cling to the sinking ship and won’t let go even while we’re drowning. Silicon Valley entrepreneurs are used to creating companies the way a cook makes hamburgers. If one doesn’t work, it’s shut down before more money and energy are spent, and before asking investors for more funding. That’s where those stories of entrepreneurs who succeeded after failing 15 times come from.
That motivation can also lead us to think that our market is every user, that our product is aimed at everyone. That’s rarely the case, even if other profiles later join our niche. Excessive motivation can make us lose sight of who our potential market is, and therefore fail to target the people who will be interested in our idea and who will pay our bills.
So why do startups fail?
To answer the question in the title, let’s change it: what does an internet business or a startup need to succeed?
We need a market
Without a market, or a specific niche interested in our idea or product, we have nothing.
We need a good product or service
If we have a market but our product is inferior in quality and price compared with the competition, we have nothing. Unless we offer significant added value, or we lower the price by lowering the quality.
We need the ability to bring that product to market
Indeed, we need a product, a market and the ability to bring that product to market. This point is the broadest, because it covers sales and marketing. You can have the best product on the market, but if nobody knows about it, we have nothing.
We should work with people who help us boost our product or service, because it will be hard to succeed in business on our own. This is also where social skills come in, along with the ability to create synergies with other companies or individuals.
There are probably hundreds of different reasons why a company can succeed or fail, including luck. Although, of course, the more dedication and effort you put into avoiding certain mistakes and learning from the mistakes and successes of those who came before you, the luckier you’ll be.
Featured image: Mark Coggins from San Francisco, CC BY 2.0, via Wikimedia Commons.
