8 Signs Your Startup Will Fail Within the First 5 Years (and How to Avoid it)

You’re finally ready to launch the business you’ve dreamt about for years. You have a real passion for what you’re doing. Unfortunately, that may not be enough to succeed. The first few years of business are like the honeymoon phase: You’re excited about the possibilities and busy learning the ropes. Failure rates are lower during this time. However, the fifth year is seen as a dangerous one by many experts, as just under 50 percent of businesses make it to the five-year mark. It’s most likely to make or break you.

What follows are some clear warning signs that your business may fail within the first five years. Knowing what these signs are and how to turn things around can help you overcome the odds and stand among the 48 percent that don’t fail.

High churn rate

If you want to succeed, you need the best employees possible. The higher your churn rate, the more time and resources you spend seeking new workers and training them. If they leave within a year or two, you’ve wasted all that time training, which you’ll now have to reinvest in a new employee.

There are many reasons for high churn rate, but a big reason is employees not feeling engaged. In one study, only 34 percent of workers claimed to be engaged at work. People are typically invested when they see positive outcomes, so something as simple as a weekly meeting to get everyone up to speed on individual and company success helps them feel a part of the team.

Bad location

Depending upon what your company sells, some locations are just not a good choice for your startup. If you’re a brick-and-mortar reliant on foot traffic, you need to choose a place that sees a lot of passersby from those in your target demographic.

For example, if your target audience is young college students, you might open your business on or near a university. Think through all the aspects of your current location and if you need to make any adjustments.

Your web hosting company sucks

Most startups today have at least some component of their business online. If your web hosting company has a lot of downtime or your CMS doesn’t update and you lose content, then you risk failure. People are impatient, and they won’t wait around for a slow website to load or come back online. They’ll simply go to your competitor instead.

Look for a reliable hosting company that allows you to scale up as your business grows. You may want to find ways of monetizing your website for that extra stream of income that pushes you past the point of failure, so make sure you seek a company that offers what you need not only today but also in the future.

You don’t have a buyer persona

No matter who your target audience is, you must know them and know them well. Creating a buyer persona gives you a chance to put a name and face to your typical customer. Develop your buyer persona based on internal data and polling from current customers. You should also study your competition and figure out who their target customer is.

Once you’ve created a buyer persona, use the information when branding your business. You must figure out how to create a lasting impression on that buyer so he or she consistently comes back to your brand over and over.

High overhead costs

The landlord just raised your rent, your electric bill is out of control and you have too many employees on your payroll. If your overhead is too high, it’s difficult to make a profit and stay in business.

Spend time looking for ways to reduce overhead. Negotiate for a lower rent if you sign a longer lease, or find a different location. Install LEDs to save on the electric bill, and if you have more inventory than you’re selling, have a reduction sale and then cut back on ordering for a while.

Business is booming, but cash is tight

At nearly every point in the life of a company, cash flow becomes an issue.

About half of the businesses that fail state a lack of working capital as the reason for going out of business. As your brand grows, you’ll get more orders — but you often must fulfill them before receiving payment. Late-paying accounts and other issues can put a real crunch on your cash on hand.

There are some solutions for cash flow issues. If the problem is growth, then a small-business loan may get you past the hump. However, be careful about taking on too much debt when money is already tight. You could also touch base with late-paying accounts and only extend credit to those with a history of settling on time. You may even want to go to a cash upfront or cash on delivery (COD) model to avoid this issue in the future.

No one wants your product

Unfortunately, you may run into a situation where there is a lack of market demand for your product. Think about some of the trendy products you’ve seen on television infomercials over the years. After a flash of interest with trendy items, there is no longer a need for them. Truly successful startups evolve and add new items or features the same audience finds interest in.

If you misjudged how popular the product would be with consumers, it’s never too late to take a step back and figure out if there is an issue with the item’s design, too much competition or you simply need to sell something different entirely.

One example of this is Avon. The brand was originally started by a door-to-door book salesman, who would offer a small gift of perfume with purchase to his female customers. He found that the gifts he gave were more popular than the books, so he eventually changed his branding and started the California Perfume Co., known today as Avon.

A few more examples: Tiffany & Co. was originally a stationary store. Hasbro sold school supplies before it sold toys. If your product isn’t working, it’s time to shift focus.

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Leadership is lacking

Your business needs a clear leadership structure. The best leaders inspire their employees, but there still needs to be a hierarchy and sense of order within the organization.

The most important leader in your startup is you. You set the tone for management and the employees under them. Teach gently and give your workers the freedom to adapt their own styles. Even though you want a clear structure to your startup, make sure all employees feel valued for what they contribute.

Push past failure

Sometimes the difference between success and failure is a little extra determination. If your business flounders, network with your fellow entrepreneurial community and brainstorm to come up with a creative solution to get past the hurdle.

Running a company isn’t easy. You’ll see others around you fail, and you’ll sometimes wonder if you will, too. However, with a little foresight and a lot of hard work, you can push your business past the five-year mark and come out stronger than before.

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