- Top 5 Reasons Why Startups Fail (and How You Can Avoid the Same Mistakes) - September 28, 2018
It goes without saying that every entrepreneur wants their startup to succeed. While starting a business, your passion and drive is often the easy part, while trying to keep your business afloat and heading in the right direction is often more difficult. With high hopes, long term plans and money going into new businesses, it’s important for startup owners to not only understand what makes a successful business, but also the factors that can bring them to a disappointing halt.
We’ve put together the top five reasons that startups fail, and ways you can avoid making the same mistakes.
Inadequate market testing
One of the major reasons startups fail is due to a lack of market need. In order to hit the ground running, entrepreneurs should have a solid understanding of the current market and its climate: what is it that people want or need, and do you have the solution? If there isn’t a problem to start with, there’s usually nothing to fix, and if you can’t find an initial demand for your product, there’s likely not space for it.
Startups should solve a gap in the market and businesses can fall at the first hurdle if entrepreneurs present something they merely find interesting, but that there’s no appetite for. Carrying out thorough and adequate research during the planning stages can be crucial when it comes to the future success of your business.
Assessing your competitors through market research can also help validate your product. There are many methods of primary research that you can try, which will also enable you to liaise with a potential customer base. Carrying out surveys or running focus groups can help you gain a better understanding of the marketplace.
Running out of cash or into too much debt
Businesses at any stage use money as their fuel, but all too often, startups fall foul of their own purse strings. A lack of financial understanding and over- or under-budgeting can have huge effects on the growth of a startup and are a major cause of startup failure. As such, founders should think about their cash flow well before it falls into a state of crisis.
Companies that fall financially short often have to turn to bank loans, but this in itself can be risky if relied upon too heavily. This is especially true if the company starts debt stacking, which is the term for when a business takes out multiple loans and/or cash advances without first paying off outstanding debts. If they are not careful, entrepreneurs may find themselves saddled with crippling debt before their business has even really begun.
To help prevent a cash flow crisis, it’s important to have an initial understanding of how quickly you’ll use up the money you have to start with, as well as how much the product or service will cost to produce. Plus, having a real knowledge of your figures is always more attractive to any potential investors.
Team tensions might not sound threatening, but conflicting visions can cause disharmony and some startups fail when their initial driving force breaks down.
It’s important to have a diverse founding team, with different skill sets around the table. Establishing a startup culture before you recruit a team will help attract the right people for your business and will reduce the risk of unhappy team members leaving you in the lurch further down the line.
It’s not enough if your startup solves a problem for a market when you first launched. In order to survive through the years, you will need to stay in touch with your customers’ changing needs and respond accordingly. Otherwise, another business will likely sweep in and divert the attention of your customers away from you.
Competitors don’t have to be the enemy, though; in fact, they can be a healthy indicator that there is a demand for your product. Just make sure you don’t become complacent.
Equally, you should carry out regular competitor analyses in order to understand what others are doing well and how you can set yourself apart.
Ignoring customers and feedback
While it’s important that a startup remains focused on the product or service in mind, a lack of adaptability and a failure to listen to customer feedback can be the death of any new business.
Startups fail when founders forget to engage with customer feedback or struggle to see its importance. Listening to the pros and cons of your product and being willing to adapt your business idea accordingly can help avoid losing out to those rising competitors and allow you to build the best product possible.
Testing the market in the initial stages is vital, but so is testing how well the product is being received. Engage with your customers as you progress and don’t be afraid to make necessary changes when they are called for.