Startups have a higher risk of a downfall than other established businesses, which is understandable considering these are brand new. Many new businesses encounter problems in the first months or years of operating, such as financial trouble, poor resource and people management, and even lousy company vision.
Depending on the line of work, different businesses face different obstacles. In fact, statistics show that most startups don’t make it past the ten-year mark. According to Olofly, 20% die within the first year, and as much as half of all new businesses stop operating within the first five years.
Regardless of its line of work, any startup is bound to jump through a few hoops before it starts to run smoothly.
Here are some of the most common reasons for startup failure.
Insufficient Funding and Poor Cost Management
Insufficient funding is a rabbit hole that many new businesses fall into in the first few months and even years before establishing their presence on the market. Attracting new investors and creating a good financial strategy are very important in the beginning.
But it’s not just having a clear financial plan that would get the job done. This also entails proper cost management and keeping track of all expenses.
In recent years we have seen a rising trend of investment in many Tech and SaaS startups. The cannabis industry is also rising following recent legislation changes all over the world.Â
But despite the relaxation of legal restrictions surrounding cannabis products and consumption, there are still many hurdles with special licensing and product authorizations that are quite costly.
Not Choosing the Right Market
One of the biggest mistakes any startup company can make from the very beginning is not choosing the right line of work.
If you’re an entrepreneur who goes with the flow and decides to follow what everyone else is doing instead of following your own passion and expertise, your business is destined for failure. You will likely fall short due to a lack of interest and knowledge about the particular industry.
So, before starting any business, think wisely about the product or service you want to create and choose the market that best represents your personality and skill.
Lack of Knowledge About the Industry
Before entering any market, the most important step is to do thorough research about the industry. Startups need to be familiar with all current, previous, and future trends in their industry to make informed, well-thought-out decisions for their businesses.
This means keeping informed about what the competition is doing at all times and how customers react to any changes in the market. In the long run, good industry knowledge will improve a company’s revenue and scale the business.
Bad Collaboration Among Partners
Miscommunication and bad partner relations are common problems among companies with more than one person in charge. For a business to thrive, all partners must be on the same page, and major decisions need to be made unanimously.
Any disagreements among partners can result in bad management, which can possibly ruin the company's reputation and cause a loss of respect and authority among employees. Many businesses fall under due to disagreements between the business partners.
Poor Marketing Strategy
In order to have a business that will scale, especially in today’s climate, companies need to have a good marketing strategy. If they’re not informing their audience about their products or services, their customer base will deteriorate, and sales will fall short.
With many marketing channels and strategies to choose from, companies today have open hands when it comes to advertising their products. When marketing is concerned, it all comes down to dedication. If startups don’t invest a bit more time into finding creative, insightful, and authentic ways to promote their business, all their other efforts will be in vain.
No End Goal
A lot of companies start out with no clear vision of where they’re headed.
Startups with a clear end goal, regardless of whether that’s reaching a certain number of customers, expanding their reach to a certain number of countries, or reaching a particular headcount, have a better chance of working out in the long term run.
And those who don’t create an end goal get easily lost or sidetracked and often fail.
Bad Timing
Proper timing is key to success; adversely, bad timing is a recipe for failure. Many businesses launch their product when it’s not fully developed or wait too long and get overshadowed by the competition. Bad timing is a common reason for startup failure in any industry.
Bad Customer Service
Great successful businesses, regardless of their line of work or their size, have one thing in common: good customer service. Not responding to the customers’ needs and maintaining a poor dialogue with them is a sure way to fail.
Bad customer care can lead to bad reviews and ruin a company’s reputation. Dissatisfied clients are not returning customers, so this problem quickly reflects on sales and revenue.
Burnout
Many new companies push their employees into a state of burnout, where they’ve exhausted their physical and mental capacities and cannot function properly in the workplace. Burnout is a major problem among many businesses; when it happens often enough, it can lead to failure.
The workload is too much to bear, so employees are not satisfied with their jobs, and the company is faced with a fast employee turnover. This eventually leads to dysfunction and perhaps even the destruction of the whole operation.
Burnouts can happen to businesses as well as people. A lot of companies start out with full force, breaking records and scaling fast within the first weeks or months of launching, but start to free fall after a while when they’ve exhausted all their resources too quickly.
Overexpansion
Overexpansion can just as easily and effectively kill a business as any of the other reasons above. When companies rush to expand their business to multiple locations or markets too fast before properly establishing their existing ones, they expose themselves to a lot of costs and uncertainty.
Opening a new store while your existing one barely stays afloat is not a good idea. You will likely face the same problems there while you double your costs, causing your business to bleed money.
Instead, It’s probably wiser to try and strengthen your existing presence and make sure everything is up and running as it should be before you consider expanding.
Final Words
As you can see, there are many reasons for a startup to fail. However, the same can be said for success – plenty of businesses have risen from the ground up and achieved remarkable results.
If you’re someone who is thinking of starting their own business, don’t get discouraged by reading about all the things that can go wrong. Instead, think of our list of reasons here as a safety precautions list.
Do your best to address every aspect that we have mentioned, and you will surely be on the right track to success.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
