5 Big Reasons for Startup Failure

Last Updated
December 24, 2020

How can you ensure the longevity of your business and avoid going under? To help steer you in the right direction, this article has listed the top reasons why startups fail, so you know what NOT to do.

1. Lacking a Product-Market Fit

Every startup has the belief that they’re bringing something new to the table, but in reality, there’s a large possibility that their idea, product, or service already exists in the market. Despite this, you shouldn’t be discouraged and should instead see the value of competing.

Product-market fit is about knowing what your customer needs, creating ways to address those needs, and making it easy for your target market to access what you’re offering. You can say you’ve achieved product-market fit if, even with competition around, customers reach for your product on the shelves. Simply put, you have succeeded when your product stands out from the competition.

In order to achieve that goal, you must understand what consumers’ needs or pain points are. Many startups make the mistake of developing their product or service before they assess specific problems consumers share (you might be having this problem now). This is one of the BIGGEST reasons for startup failure. When you have an idea of what consumers actually need, you’re more likely to develop an effective solution that customers will be willing to pay for.

Find a problem and solve it!

The next step is to figure out how you can make your product or service stand out, especially if there are already alternatives in the market. Since startups generally have less funding, try launching in a limited capacity first and assessing the outcome. Gather feedback from consumers and ask them what they find useful or not, what improvements they would like to see, and whether they would purchase your product again. Also, ask if they would choose your product over the competitions’ and why. This will give you a sense of how you’re perceived in the market and how you can rise above your competitors.

Another way to gauge the market is by testing your product through a small pay-per-click (PPC) campaign. Aside from giving your startup the exposure it needs, PPC campaigns also allow you to attract targeted leads and get a feel of how the market will respond to your product. When it comes to this, it's best to employ a PPC specialist so you get the right design, search engine optimization (SEO), and analysis for your PPC campaign.

Once you’ve collected all the necessary information from your market analyses, you can evaluate if you’ve truly created the right product-market fit or if there are improvements that need to be made. Remember, however, that assessing this performance should be continuous as consumer preferences, as well as their pain points, are constantly evolving. Translation - listen to your customer’s needs as you roll out your product or service.

2. Poor Financial Management

It goes without saying that financial management is crucial, especially for growing your business. With the right money-related strategies in place, you can invest in better equipment, hire your first employee, and scale your operations faster. So, why is it that a great deal of startup failure is due to poor handling of financials?

First, recognize the signs of poor financial management. They include failure to complete business obligations, overspending, late payments, extra fees, and an inability to implement and stick to a budget.

If financial management issues persist, consider an accountant for expert advice and hire a virtual assistant to help with the maintenance of your accounting.

3. Remaining Too Rigid

Startups are also often too narrowly focused on one product or service they have developed. As a result, they’re unwilling to change or compromise, believing that it’s what consumers want. This is a sign of rigidness that you should avoid.

Remember the product-market fit? Since customers’ needs and wants change over time, it’s vital that you consistently listen to their feedback. This will allow you to gauge what matters to your customers, what lacks in your offerings, and how your products and services can adapt to continue serving the market without being outperformed by the competition.

4. Forgetting Your Core

Your core product satisfies the most basic need of the customer. The core product is complex because it is so individualized yet often vague. That means you must have a strong understanding of your target market and the different segments of customers to accurately identify the core product.

5. Selecting the Wrong Business Structure

It’s crucial that you settle on the best business structure that addresses your current needs. The most common forms of business structure are sole proprietorships, limited liability companies (LLCs), and corporations. Each business structure is taxed differently, so you will want to choose the structure that benefits your startup the most.

You might have defaulted and chosen a sole proprietorship because this business structure does not require a lot of documents or annual fees. However, the main problem of sole proprietorships is that the owners are liable for any legal troubles their company might face. It means if you’re sued, your home, car, personal saving PLUS all the business revenue could be taken away by the court. Compared to sole proprietorships, forming an LLC allows owners to separate business assets from personal ones — providing a layer of protection.

To form an LLC, you should first find a business address in your state. Then, hire a registered agent to receive your legal notices. Afterward, you have to file your Articles of Organization to register your LLC - think of this as the birth certificate for your business. While it’s not required by most states, creating an operating agreement can help you better plan out your LLC. Trust, it’ll save you a lot of headaches in the future. Lastly, apply for an Employer Identification Number (EIN) so the IRS can identify your business for tax purposes.

JBowman is a freelance business consultant with a background in finance. She lives in Arizona with her husband and three sons.
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