Why do startups fail?

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If you are considering beginning a new startup business, you will not be happy to hear that 90% of start-ups fail; according to the Startup Genome Project. However, if you understand the reasons why new companies fail to become successes, you can avoid falling into those pitfalls.

No market need

The number one reason why startups fail is that they choose products or services that people do not require. According to CB Insights, 42% of startups fail for that reason. It is easy to see why this happens. Many entrepreneurs start businesses based on their personal interests. For instance, if you are a book lover, you may begin a publishing service. That approach is the wrong-way-round. It is essential for any business first to perform market research before launching a product or service to find out whether there is an actual market need. If no one wants to buy what you are selling, your business is doomed from the start. It is vital you get consumer feedback for any product or service before you invest your money in it.

Being a poor team leader

You may have the business acumen to set up a profitable business by yourself. But that does not mean you are automatically a good team leader. Failure to lead is a common reason for startup collapse.

The more your company grows, the more employees you will need to hire. So, you need to ensure you have a capable and responsible team to perform tasks. But if you do not have excellent managerial skills, you could end up with a weak team on your hands. You need to take command of your team if you want your business to succeed. You also need to encourage communication and employ a team with a diverse set of skills.

Running out of money

It takes money to make money. That means you will always need a good cash flow and have ways of raising additional funds when needed. Too many startup companies do not know how to use their money best to build a successful business. Running out of cash can lead to other reasons for business failure, such as the inability to find product-market fits and pivots. The best way you can avoid falling into the trap of running out of money is to hire a professional accountant to give you advice on how to handle your finances best.

Premature scaling

Every business wants to grow, so scaling-up is a step that you will want your company to take at some point. Scaling in the right way can be beneficial to improve revenue. But if you scale up too early, you are setting yourself up for disaster. According to the Startup Genome Project, nearly 70% of new companies scale up too early and fail. Too much too soon can be detrimental, so take things one step at a time. Your business is not ready to scale if:

  • Your business model is not acquiring repeat customers.
  • You are spending more time working in the business than working on the business.
  • You are unaware of the lifetime value of your customers and your expense to acquire them.

Ignoring the competition

Although it is not beneficial to obsess over your competitors, if you ignore them completely, it will be a recipe for disaster. If your company has a product that is heating-up and gaining market validation, that is the time that competitors may try to cash in on your success. So, every time you see a new product or service gaining traction, evaluate and analyse your competition so you can stay one step ahead. According to CB Insights, ignoring your competition leads to 19% of startup failures.