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Top Reasons for Startup Failure

JBowman
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Contributor
Last Updated
December 24, 2020

Today’s business world is extremely competitive. As more startups launch their next big idea, the odds of making it in the market get smaller and smaller. There’s no denying that the market is saturated. There are over 30.7 million startups in the country — all hoping to achieve long-term success. However, the Small Business Administration notes that, of the millions of startups, only half of these get to reach the 5-year mark.

So, how can you ensure the longevity of your business and avoid going under? To help steer startups in the right direction, we’ve 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 in 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. 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, 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. Selecting the Wrong Business Structure

For startups to find success in the long run, it’s crucial that they settle on the best business structure that addresses their 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.

The default business structure is a sole proprietorship. Most settle for a sole proprietorship because this business structure does not require a lot of documents nor annual fees. However, the main caveat of sole proprietorships is that the owners are liable for any legal troubles their company might face. Compared to sole proprietorships, forming an LLC allows owners to separate their business assets from their personal ones — providing a layer of protection for entrepreneurs, while still establishing the business as an official one.

Compared to corporations, where they have a flat tax on income, LLCs do not pay their own taxes but instead base it on the income of their members or owners. However, if you want to take your startup public and convince investors to fund your organization, you should start as a corporation. Between sole proprietorships and corporations, LLCs offer a great middle-ground due to tax, ownership, and liability reasons.

To set up an LLC in the US, you should first find an available name for your business in your state. Then, hire a registered agent to receive your legal notices and handle tax forms. 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 me, 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. This is similar to your Social Security Number (SSN), but for your business.

3. Poor Financial Management

It goes without saying that financial management is crucial, especially for a developing 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.

So, how do you avoid poor financial management? First, take an assessment of your cash flow and create the right budgeting strategy. To budget correctly, make a list of your expenses and total your income, then determine your monthly income. Be sure to identify all of your expenses, loans, vendor invoices, unpaid customer invoices, one-time or recurring fees, late fees, and all of the sales that flow for a clearer picture of your finances. After organizing and categorizing, the most important part of tracking correctly is understanding your finances.

If financial management issues persist, consider hiring outside help. A competent financial expert, preferably with experience in startups, can help create a sustainable financial approach for your business. Furthermore, you should be more proactive and assess your financial reports more carefully and frequently.

If you’re not well-versed in finance terms and reports, you can ask your finance head to deliver a report in an easy-to-understand format. By doing this, you will be aware of any sign that signals poor cash flow problems. You will want to avoid low-profit margin, small recurring purchases, high payroll costs, high churn rates, and delayed payments. By being aware of these problems, you’ll see when your startup needs more cash due to the discrepancies between paying your suppliers and being paid by your clients.

4. Remaining Too Rigid

Startups can enjoy having a strong customer base and consistent profits through robust planning and great execution. However, in order to keep the business running, you shouldn’t be complacent and must be flexible in order to adapt to current market trends and shifting customer needs. By monitoring the market and altering your business strategy accordingly, you can ensure that your business remains successful.

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. Be sure to stay up-to-date with the current trends in your industry, as this can help you craft creative solutions to help your startup thrive.

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. As long as you’re sticking to your core values, you should show a willingness to improve your main product or service according to what people actually want and need.

5. Scaling Too Fast

The thing about business expansion is that it requires extensive planning in order for it to be successful. While having money can help increase an expansion’s chances of success, startups often fail during this process because their customer base is not diverse enough or their products have not found sufficient success outside of their target audience. So, be sure to always keep your loyal client base in mind when scaling up. Your plans of scaling up have a better chance of succeeding when you keep your customers close and address their needs.

Furthermore, you should recognize the signs that you’re ready to scale or, to be more precise, when you should hold off on scaling. One of the most common signs is simply that your team is not big enough. Scaling entails a heavier workload, and if growing your operations means overloading your current team, then it probably isn’t the time to scale.

This creates many problems that will eventually seep into the quality of your products or service. You might have to sacrifice personalization, or at least cut down on customer support because you don’t have enough or the right workers in place. This, of course, will have a negative effect on the customer experience you provide and may reduce customer retention. The solution is to recruit more employees, which equates to additional salaries and benefits to pay. Again, if your finances cannot handle the additional expenses, you should put off expanding until you are financially prepared to take on that burden.

In the event that you find your business in the middle of prematurely scaling up, be sure to assess your plans and figure out a way to transition back to a more comfortable system. This means evaluating your finances, workforce, and resources, and strategizing on how to dial back down without abandoning any obligations or disrupting your progress. Talk to your managers and a reliable business advisor so you can come up with a plan on how to slow down your scale-up plans.

6. Forgetting Your Core

Identifying your core product or service gives you clarity and can shape your marketing and sales messaging.

To work out your own core offering, take a step back, and ask yourself why you do what you do.

You should also look at what your products or services are and whether they reflect that core belief.

And, always keep in mind that people don’t buy what you do, but why you do it.

Furthermore, your startup should have a strongly differentiated core. Having this heightens your value to loyal customers and helps you grow your products and services thoughtfully.

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. For example, a consumer who purchases a virtual mailbox may be seeking freedom and connection as they travel.

Conclusion

In order to ensure that your startup finds success and thrives in today's competitive market, you have to perform actionable steps, such as achieving a product-market fit, settling on the appropriate business structure, ensuring proper financial management, staying flexible, knowing when to expand, and remembering your core product. Through smart planning and stringent execution, any startup owner can avoid failure and drive their business to triumph.

Has this article gotten you excited and feeling confident to start your business? Check out the next article on the 9 steps to start a business today!

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