5 Reasons why startups fail
Each year, thousands of ambitious entrepreneurs start new businesses. These entrepreneurs feel bright and are full of hope as they set out to build their dream business from the scratch. However, plenty of small business statistics show that by the end of four years more than half of these businesses are gone. Most of these failed entrepreneurs had very bright ideas that could change the world, despite which they still failed.
Therefore, a good idea is not enough; it has to be backed up with a solid business plan. Moreover, there are a multitude of factors that contribute to making your start-up a success. We will discuss these in a subsequent article. Before knowing what to do right, it is worthwhile to understand what we are doing wrong and how to avoid it. So, here are five main reasons why start-up businesses fail!
- Failure to understand the real viability of the business idea
Before you go ahead with a business idea, you must try to understand the viability of the business idea. Ask yourself if what you are selling has a demand in the market. If you were a customer would you want to buy your product or service. Most businesses survive because they solve a problem, hence, you would need to understand if there is an actual gap in the market. If the same product or service is offered by anybody else, then you would need to understand the strengths and weaknesses of your competitors and how you can effectively compete with them. A market research will be really necessary to find out what your potential customers think and whether they find your product or service interesting. The information gained from the market research will really become handy as your business grows through its initial stages. This can give a quick instinct of whether your start-up will take off or not.
2. Lack of funding and heavy reliance on debt
You will need 100% of the necessary capital to start your business, having only 90% would not work too. Cash is needed to fund two main things.
- Expenses of capital nature – These are purchases you will need to make in order to set up the infrastructure for your business (E.g. Plant and Equipment, Furniture, Computer and peripherals etc.)
- Operational Expenses – These are the expenses made to fund the day to day operations of the business. (E.g. Staff Salaries, Rent on premises, Sales and Marketing etc.)
Capital could be either funded by you or a third party. However, you will need to decide the share of stake you are willing to lose through this or the part of investment cost that will be funded by debt. The mix of debt and equity has to be decided after careful consideration. Excessive amount of debt funding could put you and your business under enormous pressure leading to its downfall. Over-dominance of equity funding could also result in loss of control of your own business.
3. Absence of a business plan and/or a performance management system
A business plan is an absolute essential when it comes to entrepreneurship. Many investors are in agreement that a business idea alone is not enough if it is not backed by a solid strategic plan. Even amazing ideas turn out to be totally useless without a well-formulated strategic plan to implement them. A business plan is also the most important thing that can boost the confidence of any investor. Having a sound business plan alone will not be sufficient unless the business can track its performance against its strategic and operational plans. Many start-ups have failed not because of an absence of a business plan but rather the failure to check its performance against its plan. Continuous monitoring of the business performance against its plan is pivotal to the success of any start-up.
However, it is also important to take a disciplined approach when planning; goals should be attainable and realistic to avoid a negative performance review which can bring a bad impression on the business and affect the motivation of key personnel.
4. Poor Staff Motivation and high labour turnover.
Acquisition of top talent can be expensive, time consuming and stressful. High employee churn becomes even more of a pain point for start-ups. You have to worry about scaling operations up, while replacing a steady stream of leaving employees. Employees often want to feel valued; as a start-up, it is really necessary to show appreciation to the employees and keep them motivated. Trusting the employees and giving them some autonomy can profoundly increase the rate of retention. Most start-ups are dependent on a few key employees and such start-ups are at a higher risk of failing when these key employees are not happy.
5. Unrealistic expectations and giving up too early
Many start-up owners expect rapid growth which is unlikely for most start-ups, while some start-ups go for tragic expansions which they are unable to manage well. Failing to meet such high expectations doesn’t actually mean that the business had performed poorly. Most of the well-known giant multi-national companies have taken several years to reach their current position in the market. Amazon is one of the biggest success stories of the online era. But before Amazon became a household name, the company’s CEO had several failed ideas. One of the most notable was an online auction site, which evolved into zShops, a brand that ultimately failed. Still, CEO Jeff Bezos would repurpose the idea into what would eventually become the Amazon Marketplace.
So, it is really important not to give up too early and persevere through the difficult stages of your business. Afterall, there is no gain without pain!