90 percent of startups fail. 10 percent fail in the first year of operation, but most will make it to about five years before closing shop.
Although the wild success of a few high-flying Silicon Valley can startups can make you think running a startup is good business, the cold reality is that the days of any small business, be it a tech startup or a neighborhood coffee shop, are numbered.
If you’re wondering why startups fail at such a high rate, you’ve come to the right place. In this article, we’re unpacking the main reasons behind startups failure.
Settle in and read on!
1. Poor Market Research
The heart of any business is the product or service it sells. This offering attracts customers, thus generating the revenues the business needs to fund its operations and make a profit.
Unfortunately, far too many startups set up shop when all they have is a product or service that has no real market demand. With no tangible sales, these startups are unable to sustain their operations. While some startups are able to pivot successfully, most crumble and close down.
This is an easy problem to avoid. Do in-depth market research before bringing any product or service to market.
If you cannot say with a significant level of certainty that your products will have strong market demand, it might be better to shelf the idea. Else, you’ll blow through boatloads of cash in product development and marketing and still end up with embarrassing sales.
2. Product Quality Issues
Sometimes an entrepreneur will do market research and find that their idea is viable. With a ready market, the only thing that remains is to introduce the product and watch the sales fly off the roof.
Yet, some of these startups will undo all their hard work by making a product that’s riddled with quality issues and still decide to put it on sale.
It won’t be long before your enthusiastic customers notice the defects and file complaints. This will hurt their trust in your brand and can result in regulatory fines.
You’re probably wondering why a startup would invest heavily invest in market research and end up making a shoddy product. Oftentimes, it’s because these startups outsource product manufacturing to third parties, usually offshore manufacturers. This makes it difficult to ensure proper quality control during production.
Still, there’s no excuse for bringing a poor-quality product to market. It’s your responsibility to ensure your product, whether manufactured in-house or offshore, meets industry standards. If a manufacturer has sent you a batch of low-quality products, don’t take chances by selling them anyway hoping customers won’t notice.
3. Fierce Market Competition
Facing market competition is a natural part of running any business. Even businesses that are pioneers of new industries quickly get competitors. You just have to find ways to stay ahead of your competitors or make do with the competition.
However, new startups entering established markets start at a disadvantage. If there are dominant players that already control a sizeable chunk of the market, your startup might not be able to overcome the competition.
In other cases, big corporations in your market can resort to underhand tactics, like lowering their prices to woo more customers. Since most startups can’t afford to reduce their prices and match the big competitors, they’re left struggling with low sales.
Markets will always be competitive, but there are steps you can take to give your small business a better chance. For instance, when you’re doing market research for a new product, don’t just focus on the viability of the product. You also need to gather competitive intelligence.
Know your competitors and the market share they’re controlling. Learn their secrets and use them to make your startup better.
It also helps to sell a product that offers great value. A product that ticks all the boxes will always attract new customers, regardless of how low your competitors might price theirs.
4. Financial Challenges
There’s an endless stream of news about new startups that are raising tens of millions of dollars before they even launch a product or service. This can make you think startups are awash with cash.
Nothing could be further from the truth. In fact, of the small businesses that collapse, over 80 percent attribute their failure to financial challenges, specifically poor cash flow.
You need adequate capital to start and run a business until it’s sustainably profitable. But, some founders choose to start off without enough capital, only for the funds to run out a couple of months after opening.
Other founders make business decisions that come with big financial implications. For example, some spend big on things like office space and furniture even when their businesses aren’t pulling in any revenues.
There is a myriad of financial challenges your startups can face, and each can have disastrous consequences. Exercising prudent use of your business finances is essential, but most business owners don’t have the necessary financial skills. It’s recommended to hire a bookkeeper or accountant as early into the business’s life as possible.
If you’re a high-growth startup, you’ll do well to hire a chief financial officer. And if your startup cannot afford one at the moment, you can always turn to companies like Finvisor.com, which offer outsourced CFO services.
5. Bad Founder Leadership
Give credit where it’s due: startup founders are the reason there’s a vibrant startup culture in many U.S. cities. However, while these entrepreneurs deserve applause for taking big risks, some are the reason their businesses collapse.
As a founder, you have complete control over the business. You wield the power to make decisions as you wish, but with great power comes great responsibility. One wrong decision can bring down the curtains on your startup, but oftentimes it’s a string of bad business decisions that cause total failure.
If you thought having two or more startup founders is better than one founder with unfettered control, you’re wrong. According to one Havard professor, 65 percent of high-profile startups collapse because of co-founder conflict.
This is a classic case of too many captains sinking the ship. These founders might be on the same page before the business starts, but once it’s up and running and practical decisions need to be made, differing opinions start to arise, leading to an inevitable split.
When you’re the sole founder, it’s vital to restrain from making unilateral decisions on a whim. Seek advice from the people on your team and give them your mind before making a major decision.
And if you need to partner up with somebody, be intentional about your choice of partner. You want somebody who complements your skills and abilities; not someone who competes with them. Also, ensure you have a solid partnership agreement, just in case legal issues spring up down the road.
6. Changing Market Conditions
Market conditions are constantly changing and many businesses are able to adapt accordingly. Some changes, though, can be so drastic and unexpected that some businesses, especially the small ones, fail to cope.
The COVID-19 pandemic is an example of a black swan event that can strike and take businesses to the cleaners. In the first year of the viral pandemic, surveys show over 200,000 businesses closed down permanently.
Severe economic downturns can also have a devastating effect on businesses. Rising inflation hurts consumer spending, so businesses that sell consumer goods experience a reduction in sales.
As a business, you have no control over the economy and its effects on the market. The most you can, and should, do is to enhance your preparedness.
Market forecasts by experts will give you an idea of when and how conditions will change. Use the information to implement measures that will help mitigate the effects of the changing conditions on your business.
7. Building a Weak Team/Poor Recruitment
You might have started your business as a one-person band, but sooner or later you need to bring in more people. It’s impossible to scale a business without building a team of employees.
That being said, your workforce is like a double-edged sword. With the right team, your startup will have a great chance of achieving growth. But with a bad team, everything can disintegrate and before you know it, the business has collapsed.
Building a strong team isn’t just about hiring people who have professional competence. They need to be a good fit for your organizational culture as well.
A common mistake startup founders make is taking charge of recruitment when they’re ill-equipped to do so. Recruitment requires a certain skillset; otherwise, you could end up making many bad hires.
The best solution is to outsource recruitment to a staffing agency in your industry. If you’re a health startup, for example, let a health staffing agency take charge of recruiting for your firm. This is how you’ll end up with employees who’ll form a solid workforce that can propel your startup to greater heights.
8. Rapid Expansion
For a small business to grow into a large corporation, expansion has to occur. This typically involves hiring more employees, opening up offices/stores in multiple locations, and launching new product lines.
On paper, expansion is a good thing. In practice, though, it can result in small business failure.
The problem is many startups are too eager to expand. Especially if you have raised a healthy amount of capital, there’ll be little to prevent you from pursuing a rapid expansion.
Unfortunately, expanding too quickly can put a strain on your working capital. Your operating expenses will increase substantially, and if your revenues aren’t increasing at a comparable rate, a cash crunch awaits. Or, an expansion can result in a huge demand that can crush your systems.
Besides taking care of the financial requirements of a business expansion, ensure it’s being implemented by a team that’s experienced in managing expansions. Besides, know when to pump the brakes on business expansion.
9. Deviating from the Business Plan
Every business consultant will tell you about the importance of having a business plan. It fleshes out the business’ blueprint to success.
Indeed, most entrepreneurs will start their business with a business plan. However, some of these entrepreneurs abandon the plan and adopt a new one or run the company without any plan.
Deviating from your original business plan isn’t necessarily a bad thing. Sometimes, it’s the right thing to do. But if you stop following the plan because your startup is performing well and think it’s beyond failure, you’ll be making a big mistake.
A business plan keeps you grounded. Even when things are going as expected, you still need to know what’s to come in the future. Your plan will provide the guidance you need.
Understand Why Startups Fail
Some of the country’s biggest companies were once tiny startups operating out of garages and small offices. However, for every startup that morphs into a giant corporation, there are thousands that don’t rise out of the woods.
As this article has demonstrated, there are many reasons why startups fail. While founders are responsible for some of these reasons, others are out of their control. The best you can do is learn from them and do better.
All the best and keep tabs on our blog for more business advice.
