Everyone wants to start their business and make it successful, but most fail. Most startups fail. But many of those failures are preventable. This is a list of the top 10 reasons startups fail.
Most new businesses fail. So why are we so surprised when they do? Every year, thousands of entrepreneurs try their hand at running a company. They’re driven and ambitious people who believe in their idea enough to leave their jobs, give up security and devote all their energies to it. But most of these businesses will fail—and not just fail to make money. They will cease trading, often leaving behind debts, broken relationships and failed dreams.
The failure rate of startups is notoriously difficult to assess, but it’s pretty much accepted that the majority of new businesses don’t make it past their first five years. In the US, the Small Business Administration estimates that about half of all employers survive at least five years; a third survive at least 10 years; and a quarter survive at least 15 years. The statistics are similar for other developed countries, including the UK.
This article looks at some of the main reasons startups fail—and what you can do about them.
1. Poor management
One of the main reasons why startups fail is poor management. The skills involved in successfully starting a business—such as being able to spot and act on opportunities, mobility, and adaptability—are different from those needed to manage an established company.
In particular, many entrepreneurs are reluctant to give up any control to others.
This reluctance can lead them to take on roles that would be better filled by someone else. They may also turn down opportunities because they don’t have the right people with the right skills to help them exploit them.
The solution is to let others help you do things that you’re not good at—or cannot do. This means identifying your strengths and weaknesses as an entrepreneur, and finding people with complementary skills.
2. Insufficient capital
Capital, in the sense of money, is the fuel for any business. And this is true even for a startup that will be on the internet and have no physical infrastructure. Money is needed to cover things like business plans, marketing, salaries and living costs.
A common reason for startups failing is because they run out of capital before they start making money. It’s therefore very important to make sure you have enough cash to last you until your business starts making a profit. You can do this by doing careful market research to identify potential customers and income streams as accurately as possible; cutting costs in every way you can; and raising money from investors or other sources such as bank loans or crowdfunding.
3. Lack of planning
Many startups fail because they don’t give themselves a chance to succeed. They rush into launching their business without thinking through all the key steps.
It’s important to take your time and think about the long-term future of your business, rather than just focusing on the initial launch. You need to consider how you’re going to get customers, what you will do if things don’t go according to plan, and how you’ll develop your products or services over time.
4. Poor timing
Businesses succeed when they provide a solution to a problem that’s painful enough to customers to make them want to pay to solve it. The timing of your startup is crucial. If there’s no market need, if the technology hasn’t matured, or if you’re too early or too late, even the best business plan and product won’t help you overcome all the challenges.
If customers aren’t ready for your product or service, they may not be willing or able to pay. You can work around this by focusing on building awareness and educating potential customers before launching your business.
You need to be in touch with your customers and understand how they feel about your product or service. You need to know what they like and what they don’t like about it—and why. And you must make the necessary changes based on their feedback.
5. No market need
This is the most common reason for failure. A startup can have the best product, team and business model in the world. But if there’s no market need for what it is selling, then it will fail.
The best new products or services solve a problem or provide a solution to an existing one. Before you start a business, make sure that there’s a need for what you are offering—and that there are enough people with this need to make your business profitable.
6. Pricing/cost issues
No matter how good your product or service is, you must correctly price it. A common mistake made by new business owners is to price the product or service too low, without taking into account all the costs involved in running a business.
A low price may seem attractive to potential customers, but if it doesn’t cover your costs and allow you a reasonable profit, you won’t last long.
7. Bad location
Bad location is one of the major reasons why startups fail. For business owners, location can be a significant factor in your success or failure. Location can affect how easily customers can find you or access your products or services, and how much you pay for rent and other overheads.
If you’re a retailer, a poor location means less potential customers will see your business, which could mean fewer sales. If you’re dependent on passing trade, try to find a place where there’s plenty of people walking past every day—and don’t forget to think about what time of day they are passing by.
A good way to reduce the risks associated with location is to start up on the internet—or at least sell online as well as from a bricks-and-mortar shop. If you go online too, it doesn’t matter so much if your shop is tucked away somewhere out of sight—if people like your products, they’ll find you through search engines like Google or Bing.
However, if you do sell online too, remember that it’s far easier for customers to compare prices online than it is when they’re standing in a shop. In this case, price may be the deciding factor when they make their purchase decision (see more on price below).
One of the great things about starting a business is that you can create something from nothing, and turn it into something amazing. That being said, there are a lot of other people out there who have the same idea—and it’s the competition that can stop your success.
In a crowded marketplace, it can be hard to make an impact, let alone stand out. Often, there are already established businesses with a solid reputation and loyal customer base in your sector—and they’re not going to give up their spot as market leader without a fight.
Before you launch, do your research. Look at what you’re up against and figure out how you’re going to compete. Maybe there’s a gap in the market that no one has spotted yet. Maybe you have a product or service that’s better than anyone else’s. Maybe you’ll have the lowest prices. Whatever it is, make sure you have the answers to these questions before you start your startup journey:
- What are my competitors doing?
- What makes me different?
- Is there anything I can offer that my competitors can’t?
- Am I ready for this?
9. Poor financial management
Startups that fail in the first year usually do so because of bad financial management. This can mean getting the pricing structure wrong, taking on too much debt, or running out of cash to pay suppliers and staff.
Any business needs a steady cash flow to fund its growth and repay debts. If you don’t pay your creditors on time, they may demand payment in full or refuse to supply you any more credit until you pay your existing debts. Your bank may withdraw its overdraft facility if you miss loan repayments. And if you don’t have enough money to pay your employees, they may leave and take their skills to another employer.
The bottom line is that poor financial management can kill your business before it has even had a chance to grow. To avoid this fate, you need to make sure that your cash flow is managed efficiently and that you have a plan for repaying debts at an affordable rate. You should also keep track of your competitors’ prices and make sure that yours are competitive.
10. Poor hiring decisions
A business is only as good as its staff, so it’s important to focus on hiring the right people. Venture capitalist Guy Kawasaki once said: “The No. 1 reason why startups fail is because of bad hires.”
Hiring a bad employee is always going to be costly, but it’s even worse if you’re a startup and don’t have the luxury of time or money. Chances are you can’t afford to make mistakes.
To avoid making poor hiring decisions, always weigh up the pros and cons before hiring someone new. Consider how they will fit into your company culture and how they will work with current staff members. You should also ask yourself if you respect their character and values—and whether they bring something extra to the table.
What are the reasons of startup failure? This list of causes is based on ample and in-depth research. The article is about the reasons most startups fail or do not succeed and what you can do to have a better chance at success. As we can see from the above list, there are many factors leading to the failure of startup businesses. These are some of the commonest reasons for startup failure today. If you can make sure that these factors don’t hinder your business, you will be well on your way to a successful and long-lasting business. If you want to avoid these pitfalls, it is important that you ask for help when you need it. This can be from an adviser or mentor who will help you take your business to the next level as well as reduce the risk of failure.