You’ve probably heard the sobering statistic that approximately 90% of startups fail. This figure, however, is a bit misleading, if it’s true at all (a business could be around for 50 years and “fail,” after all — but is that really a failure?). According to the Small Business Association, 30% of businesses meet their demise after two years, while 66% do so by the 10-year mark. Still, that can be enough to turn off or at least instill a lot of anxiety in some would-be entrepreneurs.
One key to success is learning from the mistakes of others — and possibly your own, if you’ve made unsuccessful attempts to start a business in the past. So, why do most small businesses fail? Let’s look at some of the most prevalent reasons to inform your own startup strategy.
7 common reasons startups fail.
There are many reasons why startups fail, and we can't possibly list them all. These are some of the most common ones to consider as you work on your burgeoning business.
1. You didn’t do enough market research.
Are the market conditions right for your product? Does a similar product already exist? Is there a need for your new model? These are crucial questions to ask before you launch. It’s essential to ensure that your product is actually satisfying an unmet need in the market. If there’s a similar product available already, consider how yours is an improvement to differentiates itself from the competition. If it doesn’t, keep working on it until you make sure it does.
Perform market research through methods like surveys and focus groups to see how prospective consumers respond to your product. This will allow you to spot issues you may not have noticed on your own — it’s hard to be objective about your idea, after all, and an outside perspective will do you some good, allowing you to examine it from a different lens Then, you can focus on honing your product and resolving these problems.
2. You don’t have a solid leadership infrastructure in place.
You may have a great idea, but if you don’t have the right people in critical positions, your business could fail — quickly. You need people with different skillsets to work on the many different aspects of the startup, such as marketing, product development and finance. These people need to be able to work together to get your business and product off the ground. They also need to be able to work with investors and keep them informed because these people are also crucial to your startup’s success.
Moreover, remember that you’ve hired or partnered with people for a reason. Don’t assume you know better about certain areas, even if you’re the founder and CEO. Just as you have an area of expertise, so do your team members. Listen to their advice and suggestions and act on them, even if they're not what you want to hear.
3. You don’t have enough money.
The fact is, money matters — a lot. Money is critical for both getting your startup off the ground and keeping it going. Many startups fail due to a lack of funds. Common money-related problems include:
• Not enough funds to begin with
• An inability to raise capital
• Searching for investors too late
• Unrealistic ideas about how much money you need or how far it will carry you
• Misallocating funds
• Attempting to stretch your budget outside of your means
• Spending funds too quickly
4. Your business plan isn’t realistic.
Creating a sound business plan is one of the first steps you should take when starting your business. Consider and outline your goals for your startup, including benchmarks that will signify that you’re succeeding. Be specific about timelines. Make sure you’re being realistic when establishing these benchmarks — don’t overestimate when you’ll start earning money, for example, because this will only get you into hot water. Make sure you identify key steps for achieving the goals you’ve outlined and how you’ll know when you’ve achieved them.
You also need to identify potential challenges and obstacles you’ll face and devise a strategy for how you’ll overcome them. This will largely be based on research, but it can be useful to retain a consultant or advisor to help you create your business plan.
5. Your timing is off.
Perhaps you have a fantastic product idea, but the market just isn’t ready for it. Or maybe it’s past its prime; either the market is already saturated or the need for your product has passed. Bill Gross, the founder of the idea incubator Idealab, identified timing as the most important factor that influences businesses’ success in his TED Talk, “The single biggest reason why start-ups succeed.” Airbnb and Uber, for example, came out when the timing was right — the recession led to people being willing to rent out their homes to earn cash and drivers needed extra money, respectively.
Making sure there’s a demand for your product at a given time is critical to its ultimate success. Don’t assume sufficient funding will carry you to a point when the market will be ready for your idea because that may never come. And if it’s past its prime, it’s already too late.
6. You have a faulty product.
Another reason why many startups fail, one that may be difficult for entrepreneurs to hear, if that their product may just not be up to snuff. Perhaps it’s executed poorly or doesn’t meet the market demand. Or maybe, it just isn’t very good.
This is why its imperative to get feedback on your idea prior to launching. Listen carefully to opinions, especially the objective ones, which you’re most likely to find through prospective consumers in focus groups and other market research methods. (While your friends and family members may have some valuable insights, they’re not the most objective audience.) Constructive feedback is especially helpful, since it will not only point out flaws but also give you ideas as to how you can hone and adjust your product to improve it. This shouldn’t be a one-off, either. Continue to solicit feedback and make revisions accordingly.
7. You haven’t marketed your product properly or enough.
What good is a great product if nobody knows about it? You could have the world’s best solution to the most pressing problem on the planet, but if you haven’t made people aware of it, it’s worthless. That’s why great marketing is critical to your startup’s success. Ideally, you’ll be able to hire a marketing strategist to get the word out about your product, but even grassroots and less expensive efforts, such as spreading the word on social media, hosting events, sending emails, offering free content online, partnering with more established companies and telling anyone and everyone about your idea, can help you market your startup and product.
Budgeting may be tight, but most of these ideas require little to no money, aside from the time investment. More expensive ideas are paid search advertising (although you can tailor this to your budget) and advertising in relevant publications and sites. You should also try to attract media by sending out press releases and inviting them to events — this will increase the likelihood of writeups in major or minor outlets, which are an important way to spread the word.
How many startups fail in the first five years?
The SBA found that about half of startups fail within the first five years. Generally speaking, the longer a business stays afloat, the more likely it is to continue to survive.
How do you prevent startup failure?
Learning from the most common business mistakes is a key step in preventing future mistakes you might make as a startup owner or founder. Don’t assume that any of the above problems don’t apply to you, because they absolutely do. Then, do your best to avoid them. For example, you need to do extensive market research and come up with a sound business plan. Get feedback from others. Make sure you have the funding and resources necessary for staying afloat. Taking these important steps will help prevent you from succumbing to the fate of so many entrepreneurs and increase the likelihood that your vision will be more than just an idea.