Financial Poise
why start-ups fail

10 Reasons Start-ups Fail

About 9 of 10 start-ups fail. Do you know why they do? How can entrepreneurs avoid common pitfalls? The more you know, the better your chance of being the 1 in 10. The truth is, while statistics may discourage some entrepreneurs, you can learn to avoid the fate of those other nine. Here’s how.

1. Don’t Ignore Data

You need to crunch real numbers to figure out if you will succeed. Companies that ignore data analytics are missing market trends and not assessing risks. That can make or break a company.

The good news is that entrepreneurs are starting to look into data analytics and data visualization. These tools allow entrepreneurs to dig deeper into customer and competitor behavior. Using reliable data leads to better marketing and business decisions.

2. A Product Is Not a Business

Do you have potential revenue streams beyond the customer’s initial purchase? If you don’t, you are selling a product but may not be running a real business. In other words, you are not focusing on customer retention and long-term relationships, and you are limiting your ability to scale or grow.

DigitalCommerce360.com says a 5% customer retention increase boosts profits by 25-95%. Return customers buy more products over time, decreasing operating costs and costs associated with customer acquisition. Then too,  return customers may refer new customers, which costs the business nothing.

3. Prepare Yourself for Hard Work

“You have to be rigorous about making sure you’re ready and that every area of your life is in check,” says Tarek Kamil of Cerkl.com.

CB Insights says 8% of start-ups burn out, and 9% fail because the players lack passion. Opening and running a new business is hard work, and that’s a big reason why start-ups fail. Entrepreneurs must maintain their physical and mental well-being to prepare for the challenges.

4. Pay for Expert Advice

Entrepreneurs need expert advice from financial planners, lawyers, advisors, and consultants. Not all entrepreneurs have an MBA or an accounting degree, so paying the right experts is good business.

5. Scaling Too Soon May Be Why Start-ups Fail

More than half of high-growth internet start-ups fail because they grow too fast, too soon. Start-ups with an influx of capital may allocate too much cash to marketing or maybe staffing. Before you spend money, slow down and develop a well-planned, long-term strategy.

6. Don’t Cling to a Flawed Idea

Following your gut may work for some situations, but not here. Follow the data. Consider running experiments or hiring a focus group to track how much it costs to acquire each customer — and whether tweaks make that cost rise or fall. Evaluate how your product fits in the market before launching it.

Entrepreneur Jennifer Spencer lists several signs that your idea or product is no good:

  • The product or idea doesn’t fulfill an existing need or demand.
  • Your market can’t afford or refuses to pay your price.
  • Investors are not interested. This might be because the idea is not appealing or it’s not fully fleshed out.
  • Your product or idea is based on a fad that may soon be out of style.
  • Other businesses have failed with the same product. Creating a better product based on a failed product can be a good idea, though.

7. Don’t Do Everything Yourself

Are you a control freak? Severely type A? Rather than give up control and trust others with responsibilities, do you try to do everything yourself? This will inevitably lead to failure.

Adrienne Cohen, an owner of business consultancy Silverman Advisory said, “You have to trust your judgment that you’ve employed the right person to do the job you need them to do.… And that person has to feel they are trusted to do their job, and confident in being able to ask for your help and advice when they need it.”

Trust your team and delegate tasks they are qualified to accomplish. Spend your time leading the company and promoting growth.

8. Successful Entrepreneurs Know Money Doesn’t Fix Everything

Struggling entrepreneurs think if they can raise enough money to reach their next round of financing, their problems will disappear. A start-up with too much capital and no business model will quickly go belly up.

According to Ethan Kurzweil of Bessemer Venture Partners, over-raising capital causes start-ups to skip the crucial moments that strengthen the company. He says, “Start-ups sometimes avoid nailing product/market fit because they have the capital to overspend on customer acquisition — fooling themselves into thinking the fit is there. Sometimes, the team achieves product/market fit, but they never figure out go-to-market.”

9. Research and Marketing Take Time — Don’t Underestimate

Many start-ups don’t have the money or resources to grow as fast as larger companies. Organic growth takes time. Successful entrepreneurs create a research and marketing plan and a budget, so surprise delays don’t bowl them over.

10. Embrace Failure

If a few of your early ideas fail, consider it a learning experience. You probably won’t take any risks if you fear failure or even making a mistake. Of course, the life of a start-up is about taking daily, calculated risks while understanding which risks are tolerable. Once you overcome those fears, you will guide your company in the right direction, learning to manage risk as you progress.

It’s essential to understand why start-ups fail. If you analyze the data, develop customer relationships, develop a plan, and listen to the pros, you will certainly make fewer mistakes. You may become one of the few to make the 1 in 10 list.


[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

This is an updated version of an article originally published on September 26, 2019. It has been updated by Maryan Pelland]

©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

 

About Matt Niksa

Perhaps the youngest person to ever write for Financial Poise, Matt Niksa was an editorial intern with the company during the summer of 2016. Prior to that he was a contributing writer for AOL and Medium.com.Subsequent to his time with Financial Poise, Matt was a correspondent with the Palo Alto Daily Post.

Read Full Bio »   •   View all articles by Matt Niksa »

follow me on:

Article Comments

  • David M. Freedman says:

    According to Shikkar Ghosh at Harvard Business School, “If failure means liquidating all assets…then the failure rate for startups is 30 to 40 percent. If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent.” (HBS 3/7/11)

    According to the Small Business Admin and the Bureau of Labor Stats, about half of all new establishments survive 5 years or more, and about 1/3 survive 10 years or more. (SBA Office of Advocacy, Sept 2012)

    • Maryan Pelland says:

      Thanks – good information. Statistics are tricky. We also find, from nanoglobals.com: “Startups: 90% failure rate —
      For companies classified as startups due to their innovative and potentially disruptive product, the failure rate is much higher [than the average]. This is because, in their ideation phase, they have not yet reached their growth stage or even determined product fit.”

  • >