Financial Poise
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Why Startups Fail: 5 Mistakes that Lead to Failure

Empowering Entrepreneurs Despite Difficult Odds

Nine out of ten startups fail. That’s the bleak truth. While this statistic may discourage some entrepreneurs, it should also encourage them to learn how to avoid the fate of those other nine.

Here are five reasons why startups fail and how entrepreneurs can avoid common mistakes. The more you know about them, the less chance you make them:

1. Ignoring Data

Believing you can succeed is all well and good, but you need to actually crunch the numbers to figure out if you’ll succeed. Companies that ignore data analytics are losing out on market trends and are not accurately assessing risks, which can make or break a company.

The good news is that data analytics demand has increased four-fold, and data visualization demand has increased by 25X. These analytics give entrepreneurs the tools to dig deeper into the behavior and emotions of their customers, as well as the behaviors and impacts of their competitors. Using this data smartly leads to better marketing decisions and business decisions in general.

2. Confusing Your Product with a Business

Do you have potential revenue streams beyond the customer’s initial purchase of a product? If the answer is no, then you are selling a product but not running a business. In other words, you are not focusing on customer retention and a long-term relationship with the customer.

A study by Frederick Reichheld of Bain & Company found that a 5% increase in customer retention actually increases profits by 25%. Reichheld explains that return customers buy more product over time, which decreases operating costs and costs associated with acquiring new customers. Return customers are also more likely to refer their friends and family, which is of no cost to the business.

3. Not Preparing for the Emotional Toll

It is imperative that you get proper rest and nutrition and shore up relationships before starting your company. “You have to be rigorous about making sure you’re ready and that every area of your life is in check,” says Tarek Kamil, founder and CEO of the communications platform Cerkl.

CB Insights reports that two of the reasons why startups fail is a lack of passion (9% of entrepreneurs) and burnout (8% of entrepreneurs). In order to avoid burnout and maintain passion, entrepreneurs should take care of their physical and mental wellbeing.

4. Not Paying for Expert Advice

Find an expert whose job is to recognize exactly what you need to do, like drafting term sheets. Not all entrepreneurs have an MBA or a degree in accounting, but using expert advice can help entrepreneurs avoid startup mistakes.

Entrepreneurs can find expert advice from financial planners or financial advisors, business coaches and professional consultants.

5. Scaling Too Soon

According to a 2011 Startup Genome report, 74% of high-growth internet startups fail because they scaled too fast, too soon. When startups get an influx of capital, they quickly allocate too much cash to things like marketing to new customers or hiring extra employees. Before you spend the cash, take it slow and develop a strategy that will benefit the company in the long term.

If entrepreneurs take a step back to analyze data, develop customer relationships, develop a plan and listen to the pros, they will be less likely to make these startup mistakes.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Turning an Idea Product into a Business, Raising Capital: Negotiating with Potential Investors and Negotiating a Commercial Lease. This is an updated version of an article originally published on August 2, 2016.]

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, and subsequent to his time with Financial Poise Matt was a correspondent with the Palo Alto Daily Post.

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