Here are the top 10 reasons most startups fail with tips on how to recognize these issues and take steps to avoid them.
We recently discussed the number one reason startups fail based on data from CB Insights. In this post, we’ll discuss the top 10 reasons new business startups go kaput.
This data is, in a sense, a history lesson. And you remember what your 5th-grade teacher told you about history. Those who don’t know it are doomed to repeat it…
No plan is perfect, but consider these issues as you start taking your entrepreneurial dream and turning it into reality.
#1. No Market Need
This is the big one that causes 42% of businesses to fail. It’s such a concern that we outlined this issue in its own post (The Number Reason Startups Fail).
Suffice to say here that if people don’t have a need for your product, you’re going to struggle. Do everything you can to get objective opinions about your idea and try to view both your product and your branding with the fresh eyes of new, prospective customer.
It’s common for entrepreneurs to get so caught up in what they think is a great idea that they go blind to the reality that not enough other people (meaning a viable market who will buy what you’re selling) actually want it.
Walk in your customer’s shoes – and keep walking in them. If there is no market need for your offer you really shouldn’t be in business in the first place.
#2. Ran Out of Cash
29% of failures. We hear this one all the time.
Three words. Plan. Your. Budget.
A big consideration here is whether you plan to go it on your own or pitch to investors. If you’re doing something totally new and have no track record, you may struggle to even get traditional bank loans, so look into alternatives.
In the final analysis, you need to plan for how long you can operate without turning a profit. It may take several years for you to build brand awareness, find the right sales channels, gain market share, and streamline your processes.
Things like brand building and sales channel discovery can’t be done in a panic. Get your budget in place and be prepared to make a reasonable run at profitability.
#3. Not the Right Team
This one hits 23% of businesses and must be given equal weight to budget.
Who you work with and the talent you need to recruit to execute vital tasks is vital. This includes both the people who work for you and the vendors you outsource work to.
Putting together a team and workforce is not an exact science. Ultimately, you work within a scope of who is available to you. Some really good advice for hiring comes from Seth Godin:
Hire for attitude, not for learned skills. You can teach someone to do just about anything. It’s far more difficult to build an instinct to care. When you hire trustworthy people who are willing to trust you, you have an opportunity to build trust, which enables communication, which allows you to teach, which upgrades everything.
If you are in a hurry to assemble a group of people who can ‘do the work’, you will end up with folks who merely needed a job. On the other hand, if you are willing to invest in people who are enrolled in the journey you’re on, you will end up with a team.
[Corollary: Fire for attitude, fix for skills. The attitudes you put up with will become the attitudes of your entire organization. Over time, every organization becomes what is tolerated]
This is powerful advice as well:
Company culture plays a big role in being successful, and culture is made of the people you hire. Know the type of people you want to work with, seek them out, and get them to seek you out.
#4. Get Outcompeted
Business owners who failed say they “got outcompeted”. But this glosses over the real truth.
Most businesses lose out to the competition not because they got beat, but because they didn’t really know who they were competing against.
The problem you need to be most aware of is not getting outhustled. It’s presenting a case to customers that legitimately communicates why you are the best choice.
This means you need to understand what other options are available and articulate your unique value. If you don’t know why consumers should choose you over your competition, you can be certain they won’t.
Jack Welch famously said:
“If you don’t have a competitive advantage, don’t compete.”
Most businesses that fail don’t get outcompeted. Instead, they go into business without a clear advantage (see problem #1).
#5. Pricing/Cost Issues
We once worked with a client who wanted to sell his premium dog food online. He put together his website, downloaded his products, and came to us for marketing help.
Initially, everything looked good. A fine product at a competitive price. But as we drilled into things, a detail emerged.
He failed to calculate in shipping costs. He planned to ship 50 lbs bags of dog food direct to consumers without calculating that shipping was destroying his margins.
This was such an egregious oversight we didn’t initially even look for it (never make assumptions). But miscalculations about production costs, inventory management, fulfillment, and where these leave your pricing can be big trouble.
Again, careful upfront planning is the best way to ensure your transactions make money. Get into the details and make sure you can manufacture, market, and deliver your product and still turn a profit. As to point #4, make sure your prices are competitive and aligned with the value you offer.
#6. Poor Product
The issue here often relates to cost. In order to save money and create workable margins, businesses start cutting corners.
Suddenly, the specs aren’t quite up to what you planned. You can do everything – with fewer people. You automate when you should personalize.
For most businesses, there is a tipping point where cutting corners on quality impacts core value. If you promise quality but deliver cheap, you’ll lose in the long run.
It’s harder than ever today to cut corners because reputation is such a significant aspect of your marketing. Like it or not, customers will share their experience online and the content they create will have a huge influence on new prospects.
If you try to push a low-quality product on today’s consumers, you’ll get what you deserve.
#7. Lack of Business Model
There are a surprising number of startups that take significant initial steps in production, inventory management, and marketing for their new business without having any formal business plan.
If they need funding, they often have to backtrack to create a business plan to outline what they’re doing.
So write up a business plan your local bank or VC will be happy with. Then move beyond it.
Your business model is, in many ways, an outline of how you’ll avoid the issues listed here.
- It’s a way of viewing the marketing landscape without bias.
- It’s direct assertions of things you will do.
- It’s a deep down, gut feeling that lets you know what type of people you want to work with.
- It’s a plan with viable alternatives you’re ready to execute if things don’t go as planned (and they won’t).
- And it’s smart details about how you’ll use money.
Most of all, you business model is total confidence that you deliver a quality product a certain group of people really need, with details on how to ship it profitably. Issue #1 and #7 run hand in hand.
#8. Poor Marketing
You can be doing everything right with your business, but if nobody knows about you you’ll fail anyway.
The biggest underlying problem with most startup marketing is that they look at it as an expense instead of an investment.
This mistake hamstrings marketing campaigns in the worst way. In most cases, there is a threshold a business needs to invest in marketing to gain momentum for their brand. When that threshold is passed, marketing begins to pay off. If it is not reached, marketing becomes a sunk cost.
Some marketing campaigns do well. Others prove less effective. You test and continue with what works best. There is no strict right or wrong way to market a new business.
But if you approach marketing as an expense you’d like to keep cheap (see #5), you won’t invest in what’s needed to build your brand to a sustainable level. That’s poor marketing – literally.
Digital, multichannel marketing is complex, even for small businesses. If you feel in over your head, contact a marketing agency for some help. The right tools and professional help can make all the difference.
#9. Ignored Customers
This is the most regrettable of reasons for a startup to fail.
Note something very important. Nobody ever sets out with the idea that they’ll ignore their customers. Quite the opposite. Everybody believes they’ll go above and beyond.
But then life gets in the way. A million tasks come crashing down at once. You start trying to get away with what you can. Best intentions slip away.
Then one day you wake up and realize that your customer loyalty isn’t there. You don’t have a core group of heavy users who love what you do. You’re clawing and scraping for every new lead because you have no customer retention.
Never take your customers for granted. Prioritize them because retaining customers is cheaper than constantly having to earn new ones. Because they’re the reason you’re in business.
And because they’re a huge part of your marketing. Again, word of mouth, review sites and social media mentions are vital content for your branding. Without them, you’ll have a tough time persuading today’s consumers that you’re trustworthy.
Every startup needs to excel at customer service. We live in a customer driven world where product quality is increasingly commoditized. Ignore your customers and you’re giving away one of the strongest competitive advantages.
#10. Product Mis-Timed
This is a tough one you may not have total control over. Sometimes, a product hits just because the timing is right. The consumer public picks up on it and it goes viral.
Other times, it doesn’t.
Timing starts early on when you’re hunting for business ideas. What’s trending now, and what’s likely to trend? What’s a problem that’s increasingly common that doesn’t have a solution?
There may be an event or season that’s better for your launch, but for the most part your timing is a hunch. You can’t predict the future, so you won’t know for sure until you try.
Hope for some luck, then rely on your data. What does it tell you about how your product and message are being received? What can you tweak to improve responses?
Avoid the first 9 problems listed here and take timing as a practical risk, and you’ll give yourself a good chance at success.
A survey of failed startups generated this list in this order. Learn from history. Most failures have their roots in planning mistakes, which means that better planning is the way to avoid them.