It stops so many in their tracks... Fear of business failure is real. And so is the fact that more than 50% of new businesses fail within the first four years (stat credit).
That's a scary reality.
Millions have puzzled over why the failure rate of new businesses is so high, but the research is in! Read on to discover the top 9 reasons so many startups wind-up DOA (and how we think you can avoid them).
It’s a cut-throat world out there for fledging entrepreneurs, and it’s a sad fact that many of them, despite passion, sweat, and even funding, can’t get their startups off the ground. Business failure is the ultimate fear for most entrepreneurs, and it's easy to see why. Checkout the following stats from Small Business Trends:
Business Failure Rate Statistics (for Startups)
A bit more than 50 percent of small businesses fail in the first four years.
In fact, of all small businesses started in 2011:
4 percent made it to the second year
3 percent made it to the third year
9 percent made it to the fourth year
3 percent made it to the fifth year
So, what’s the deal with startups? Why do so many budding businesses miss the mark?
According to a study by CB INSIGHTS, we can tell you exactly why.
Here, then, in descending order for dramatic effect, are the top 9 reasons would-be startups fail and how we think you can avoid them…
The Top 9 Reasons Startups Fail
9) They Didn’t Incorporate Consumer Feedback
14% of failed startups failed because they dismissed customer reactions to their product.
I get it. We all want to turn down the volume on “haters,” but, the fact is, there is something really valuable in constructive criticism. Learning what users don’t like about a product can help you offer something more robust.
Solid customer feedback allows you to better understand your consumers’ needs, and, applying that feedback can help you build a stronger relationship with your target users. Nobody likes to hear the hard stuff, but doing so can help you beat the odds. If you listen to your customers, they will like you better.
8) They Relied on Crappy (or No) Marketing
14% of failed startups failed because couldn’t effectively market their product.
Marketing is hard. It takes a lot of effort and a lot of testing, but once you get it right, it’s like a double rainbow.
Find your audience and talk to them directly.
Make your marketing affect your consumers.
Appeal to your consumers on a personal level.
Make friends with your market and,
Despite all the distractions in their daily lives, market to your audience so that they'll remember you.
7) They Didn’t Have a Business Model
17% of failed startups failed because they didn’t form and follow a business plan.
Startups are often built on the backs of developers. This is not necessarily a bad thing, but a successful startup needs at least two legs to stand on: one of solid development, and one of solid business strategy.
Failing to realize that “business” (meaning, business planning and business strategy) is required to actually start and run a company is a swift kiss of death. No matter how brilliant your idea, or how innovative your developer, no business can succeed without a solid business plan.
This may seem intuitive, but many new startups overlook the importance of incorporating business into business. Without that infrastructure, even the most profound technology can’t sustain a successful company.
6) They Jumped the Gun (or, They Released a Product Too Soon)
17% of failed startups failed because they offered an underdeveloped product.
Whether the issue lies in concept or in development, you cannot take a half-baked product to market. Period.
Yes, you need to get to market. And the quicker you get there the better. But you can't feed someone raw chicken, and you can't release a crappy product. Survival of the fittest applies in business, too, and the weak will not flourish. Users can detect a bad product, and they simply won’t consume it.
Ranging from competition to inexperience, there are a handful of reasons smart entrepreneurs will launch a product too early. For this reason, I’d like to raise one quick point…
Launching an underdeveloped product is not the same as launching a strong MVP.
If thoughtfully executed, launching an MVP (Minimal Viable Product) can be extremely advantageous. Don’t confuse MVP with “meh.” They are not the same.
5) The Price is Wrong
18% of failed startups failed because they couldn’t set the right price for their product.
At one time or another, we’ve all been there… In the negative. It makes me cringe to think of it, but there are many startups who live and die with a negative balance in the bank.
What’s the answer? Raise your prices!
No… That’s not right. The real answer, of course, it set and stick to a budget, so don’t let rash decisions while on a shoestring force you into becoming full broke. If you set a price for your product that is prohibitive or simply not in-line with what you’re offering, no one will buy it. If no one buys your product, you’re out of business.
But... If you did say "raise your prices," you're still kindof right. Because the same thing can be true for prices that are too low. If your price does not reflect the value of your product, consumers will think it’s crappy. On top of that, you won’t make any money to cover costs, you certainly won’t be profitable, and, eventually, you’ll go out of business. Don't reduce your revenue potential by not charging enough for your product.
Ultimately, you have to find a price that communicates value without creating a consumption barrier for your market. You have to pay for your overhead and become profitable, but you can’t be cost prohibitive either.
It’s not always easy to do, but if you can find the right price-point for both you and your users, you’ll gain more business, and you’ll stay in business.
4) They’ve Been Beat to the Punch
19% of failed startups failed simply because they got outcompeted.
The minute you decide to take an idea to development, it’s crunch time!
While there is only one you, there are one-zillion entrepreneurs out there, and many of them are after the same corner of the market. When launching a startup, you are literally racing who-knows-how-many others to the finish line. This is where an MVP and Agile product development can really accelerate your process.
Remember number 6? An MVP is not a rushed or premature launch. It’s a careful, strategic build that includes your most integral features with the least expense of development time. Incorporating this into your business plan can help you reach milestones faster and launch a product sooner.
Getting your product to market is crucial, so if you want to B-slap your competition, a great MVP is often the most powerful way to do so.
3) Their Team Can’t Hack It
23% of failed startups failed because they broke down at a human level and, as a team, they simply couldn’t go forward.
If your team isn’t unified or if it lacks a full spectrum of necessary skills, a project can unravel. Being the third most sited reason that startups go under, the importance of companionship, camaraderie, and cooperation in a successful business cannot go unsung.
A strong team supports itself and supports its product. As you go forward with your own startup, build your team of individuals who have diverse skills but who can also work together.
2) They Go Broke
29% of failed startups failed because they ran out of money.
Money talks, and in the world of successful businesses, almost everything comes back to the almighty dollar. If its’s not properly budgeted, spent, and recouped, your startup will perish.
While it’s often true that you have to spend money to make money, you have to spend it extremely cautiously.
1) There is No Market Need
42% of failed startups failed because there wasn’t adequate need for their product.
While ensuring there is a legitimate demand for your up-and-coming product may seem like the foremost concern of any new business, NOT doing so is the leading cause of startup failure.
If common sense suggests that a successful business must satisfy a real need for consumers, why does this blunder account for 42% of failed startups?
Well… They say love is blind, right?
Many startup founders have fallen madly in love with their great idea. And this is a good thing; it gives them fire and passion and a chemical reason to carry-on through the thicket of business creation. But that love-blindness can also mean that a founder is so invested in his own idea, that he doesn’t realize that consumers might not feel the same way.
To take-off as a business, consumers have to love your product as much as you do. But, to achieve that connection, your product has to work really hard; it has to solve real problems for your market in a way that makes them realize they no longer want to live without it.
If you’re affected by love-blindness, there is a way out! The first step is acknowledgement, and the next step is market research. If you thoroughly research your market need, it will put you and your idea back on track.
There are a lot of reasons why a startup might not make it, and many startups suffer from several or all of these pain points at once. But don’t become discouraged; failure is an inevitable part of success.
This means there is work to do, but you can break the failure mold if you find balance between quickness and caution.
employ business strategy
plan for everything
anticipate your competition
acknowledge the power of customer feedback, and
respect the advantages afforded by Agile product development
These things will get you to market faster and with a product you can be proud of. So, go get ‘em! You now have the tools to avoid common blunders and to create a stronger, more sustainable startup.
Do you have your own startup story, or a great piece of advice? We’d love to hear it!
Share your thoughts in the comments section below.