7 reasons why startups fail (and what to avoid like the plague)
Why do so many startups fail? I can tell you from direct experience that no matter how compelling or timely, a great idea for a service or product alone provides no guarantee of success. In fact, many startups languish or outright fail within a couple of years of their launch. Let’s try to even the odds a little by sharing a few common mistakes startup teams make. Maybe you can avoid some of these potholes and pitfalls…
A big idea, but no plan
You believe in your potential for success. So, plan it out! Every good business idea deserves a great business plan, including a marketing and sales strategy. App-builders, for instance, often create an elaborate product dev strategy. They believe if they build it, “they” (meaning customers) will come. Then they discover that nobody cares.
Planning helps you uncover challenges, preempt problems, and mitigate risk. Building an integrated plan (meaning that one that accounts for operations, finance, marketing, sales, etc.) will help you think through how everything will work. You can find the best direction for your business before you take the plunge.
No mentors or advisors
Speaking of getting feedback, ask some business people you admire to mentor you. Keep in mind that you don’t have to have all the right answers all the time. The world’s biggest organizations have boards of directors to help them. Who can you engage to help you make decisions, see opportunities, and introduce you to people?
Learning from other peoples’ successes and failures (not just your own) can benefit you. Demonstrate the courage and maturity to invite feedback, even when it’s inconvenient.
A lack of relevance
Speaking of inconvenient truths, “no market need” are reported as the number one reason small businesses fail. If you build a solution looking for a problem (versus the other way around), you may not find it.
Instead, strive to meet unmet needs. For example: P&G’s Swiffer product replaces the stinky, old mop. Whitening toothpaste helps improve your smile (not just care for your teeth and mouth). So, ask yourself: what unmet need does your service or product satisfy? And does the world really need what you intend to offer? Can you put a twist on your product or service to make it more novel and exciting?
Starting a business often means going on out on a limb financially. The Hiscox DNA of an Entrepreneur report found 17 percent of U.S. and European business people it surveyed used their credit card to fund their business. But even if you do take on debt, you can also take steps to safeguard your finances. Become a stickler for your numbers. Keep cash flow in reserve. Avoid over-extension, and aggressively maneuver to keep your costs down—at every turn.
Like metal bands, many legendary Silicon Valley firms started up in garages for a reason: No rent! Over-committing to an onerous lease or other unsustainable overhead can create financial pressures in the startup phase. So, avoid costs! Be cheap, even! At the very least, stay lean and mean. Establish solid revenue before you lease that funky loft space. And keep in mind that a great website will do more for most businesses than the swankiest office space ever could.
Not enough patience
Our greatest commodity as entrepreneurs is time. But somehow, new entrepreneurs often set themselves up to run out of it. Transforming your startup into a viable business takes time, sometimes even years to become sustainable and profitable. Have you accounted for the time and money you need to get your startup to a healthy place?
Try calculating your “burn rate” (how long it will take your business to run out of cash). If you cannot sustain yourself for longer than a quarter, you may want to reconsider ditching your day job(s) for a little while longer. Maybe you can hold off until you develop a better plan or find some investors? Ultimately, rushing can seriously undermine your success. Remember: slow and steady wins the race.
You may be a world-class designer or a brilliant sales person, but how much do you know about marketing, accounting, or business strategy? Every successful small business person I know gets forced to wear hats they hate. They end up having conversations about subjects they don’t understand and doing things that are “beneath them.”
Your best bet? Try to check your ego at the door. Any sense of superiority or entitlement you have will probably disappear fast, if you want to survive. Opening a hair salon? Plan to sweep up lots of hair. Launching a restaurant? Get ready to scrub pots. Exporting high-end products to Dubai? Get ready to pack the boxes yourself.
Whether you sell goods or billable hours, you should try to understand how to calculate profit margins. It may seem obvious, but too many startups and small businesses cannot report on which portfolios or customers profit them the most. They can report on revenue, sure, but profit margins? Not so much.
When you measure how much profit you make from projects, for instance, you may discover that some customers literally cost more to service. This data may help you make decisions about which relationships to focus on (and which to let go). The same holds true for products. You may find that your most popular products make you the least amount of money.
For obvious reasons, startups and small businesses tend to fixate on revenue. But if you factor profitability into your thinking as well, you’ll end up making smarter decisions.