This article discusses the seven most common reasons that a majority of startup businesses fail. I hope any to-be business owner reading this will prepare adequately against the factors discussed here. There are more than 10 reasons that startups fail, but we focus on these seven as they are the most likely challenges you’ll face when starting a business.
Table of Contents
Poor Market Research
For people to remove money and buy your product or service, they must need it. No matter how good the product or service you provide is, if people don’t need it, they won’t buy. That’s why you must conduct thorough market research on your target market, and be sure they need a service or product like that before offering it.
Researching your market enables you to locate customers, understand the market size, and whether or not your customers can afford the service or product. There are times where people need a particular product or service, but they are small in number, and the cost in R&D of production such products may be too high for the few customers to cover and make you any reasonable gain.
Sometimes there is a low number of prospective customers because people using such services or products are not many due to that product or service industry not being mature yet. In the case of an immature market, you should time your entry well. This means to make sure from your market research shows that demand for that particular product is going to rise with time as technology improves. In such cases, it’s not a wise idea to give up your product or service offering.
Correct timing is what matters most. You could launch when there are just enough potential customers to sustain the business until the market matures. But if you want to a foothold in the industry before competitors enter, and you have the running cost to sustain your business through the early low-profit stages, then proceed to launch the product or service.
Wrong Business Model
Some businesses fail because the entrepreneurs were too optimistic about the prospect of success and they didn’t believe there’d be a challenge in acquiring customers. Many think if they could develop products or services that people need, with a good website and strong marketing campaign, people would prefer buying theirs, especially if their product is slightly superior to that of their competitors. They could achieve sales at first, but as time goes on, it becomes ever more difficult to acquire customers or stay in business due to competition or other industry factors affecting the business.
It may even be very expensive to acquire a new customer, like when the cost of acquiring a new customer is higher than the lifetime value of the customer. Provided you cannot acquire a new customer at a lower cost than the value that you get from those customers, your business will eventually fold up as advertisement and promotion cost suck up your revenue. Problems normally arise when an entrepreneur doesn’t figure out early the cost of acquiring a new customer. You should assess the industry and competition, map out a customer acquisition strategy, preferably through the cheapest means possible.
Poor Management Team
If you don’t have a good managing team, they are going to run the business down in the end. An incompetent management team will make several mistakes like adopting the wrong customer acquisition strategy or not having a strategy at all. The team might also conduct poor market research that doesn’t really capture the true landscape of that industry or competition, mistakes in market sizing, or market potential.
Generally, weak management teams have certain characteristics in common such as: paying less attention in developing a product or service that can beat the competition by offering values that competitors do not or cannot, or at least be at par with the top players. This is typically a result of a hasty decision to launch a product. That causes a business to fail. Sometimes the management team develops a good product or service but lacks an effective strategy to deploy it on the market.
A poor management team typically fails to execute even the best laid-out plans in an efficient way. They either execute the plan late or make fatal mistakes that result in great losses. A poor management team hires poor workers, and that’s because they are weak themselves and that makes it difficult to know which is the best person to hire.
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Running Out of Funds
Some startups will start quite well, as time goes on, revenue starts to dwindle until it reaches a point where the profits can no longer support operations. Such businesses might lack the best strategy for creating an awareness even if their service offerings and products are good. Regardless of how good a product or service is, if a brand is not known in the market, it can hardly make any reasonable sales. But this, I mean a brand that has no or little consumer loyalty.
There are businesses that start small with prototypes of products or services to test in the market and continue to improve the product or service based on consumer feedback and request. Such types of businesses are mostly in the software industry. Therefore, a business that does not have enough resources to sustain it through the trial phase, it’ll lead to the business running out of funds.
Sometimes companies also test the business model exploring competitive advantage in the market, and because such experimental models can take time to understand, you need more money to sustain the business. The advice to entrepreneurs is that they should start slow and not attempt to accelerate things before being fully convinced of the veracity of your strategy or the product/service you offer.
Going slow helps conserve cash while learning more about your business and market. For example, it is not a necessity to hire many sales marketing personnel, or launch an expensive marketing campaign or buy some expensive software that’s not critical to operations when you are not sure of the potentials. If there is a way you can execute some process manually at first because of the low demand, it is better to it manually and when the business grows you can leverage expensive software to automate some processes.
Poor Product Performance
If the product or service on offer is not up to market standard, you will suffer losses, especially if there are more competent competitors on the market. You will be forced to significantly beat down your prices so low that the profit margin might be too low to sustain the business for long. You even risk making a bad name from the start such that people avoid any future products or services from you, and that makes it difficult to acquire more customers, make you spend more on advertising and other promotions, and even dissuade new customers based on the feedback from your old customers. That is why you must think through your product and service offerings thoroughly before introducing them to the market.
If you find a place to improve, always try to make such an improvement. But don’t let poor customer reception discourage you from continuing business. A bad reputation can often be fixed. Many companies started with products that didn’t meet the market needs but learned from their mistakes and keep improving it until people finally fall in love with the company.
Pricing is a very tricky component of a startup. You must price high enough to get the profit to sustain the business and at the same time keep it low enough to attract the attention of customers. The way it goes is for you to make a thorough calculation and offering that is midway between appealing to customers and having enough to keep the business moving through the initial stages.
The wrong reason to start a business can also break your startup. Most of the successful companies in the world started with motives that are not purely profit-based. They have some humanitarian mission attached to the goals of their business, and they work hard to achieve that goal. In the process, the business grows far beyond anything their owners might have envisioned because their target is to satisfy people – a task that often requires a great deal of work. Their focus is more on quality than profit, and people get to also see the humanitarian mission of their business and even patronize them more.
So it’ll be a good idea to focus on how people will benefit from the product or service you are offering. Customers can often detect greed from aggressive marketing campaigns, murky business terms, etc. and that turns them away. Doing business with the aim of helping people or solving a problem will make you passionate about that business, and you aren’t likely to be discouraged by challenges.
There are other problems that cause startups to fail which we haven’t mentioned here. The aim of this article is to discuss the seven major ones that are almost always the reason a new business folds up. However, we’ll just list some briefly to give this article a more complete impact. Some reasons your startup might fail is due to insufficient capital. No business can take off without major capital support, especially if you haven’t developed your product or service to the level that it’ll attract many customers and keep you moving.
Wrong locations also contribute to startup failure. Maybe you got everything correct except for the business location. For example, locating your business where customers are not many or the environment is difficult to access, like in the case of a restaurant in a busy area without a parking space. Customers are always discouraged to patronize you whenever they remember there might not be space to park their cars. And if you have a competitor that provides such convenience, the odds are that you’ll lose most of them to your competitor even if you charge less price.
Finally, like I said above, there are many other reasons that can bring down a business that is just starting. It might not be any of the points we discussed above, but it’s likely to involve one or two. Another mistake that startups make is to over-expand when they start seeing a period of growth. You must always strive to go gradually and resist the greed to accelerate with everything you’ve got until you are certain the prospects warrant such expansion. Again, you should conduct in-depth market research on the industry and be objective in doing so. Having a good vision of what you are likely to face helps you prepare and overcome challenges ahead. If you know other reasons that cause startup failure, consider sharing them in the comments with other readers.