Statistics show that the survival rate of start-ups in their first year of operation is only about 20 percent and that as much as half of small businesses fail within their first five years and over 70 percent after 10 years. Having spent the last couple of years working full time with dozens of start-up founders and CEOs on their strategies and funding plans in my consultancy business, I have observed that there are a common set of reasons why start-ups struggle and fail, and a consistent set of factors that make start-up companies successful.
Here, I will share 5 common reasons which cause start-ups and small businesses to fail:
“Having spent the last couple of years working full time with dozens of start-up founders and CEOs on their strategies and funding plans in my consultancy business, I have observed that there are a common set of reasons why start-ups struggle and fail, and a consistent set of factors that make start-up companies successful’’.
Poor Management Team
An incredibly common problem that causes start-ups to fail is a weak management team. The business owner is responsible for putting a management team in place. Not having a strong management team will result in poor fiscal health of the business, weak strategy, product development, poor go-to-market, poor execution, and weak teams.
New business owners should identify and educate themselves on the required business skills they need, hire skilled employees, or outsource work to competent professionals.
Market Problems
Start-ups run into the problem of being little or having no market for the product that they have built. This often is a result of the absence of a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing and a wrong market timing. Sometimes the market size of the people that have needs and have the funds is simply not large enough.
Insufficient Operating Funds
A leading cause of business failure is having insufficient operating funds. A key job of the CEO is to understand how much cash is left and whether that will help the company to reach a milestone that can lead to successful financing, or cash flow. New business owners often don’t understand cash flow or underestimate how much money they will need to get the business started. As a result, they are forced to close before they have had a fair chance to succeed. They may sometimes expect that once the business starts, income should start flowing in. As usual, this is not always the case, and this setback can make them give up without even trying further. Also, the inability to manage a loan and adequately put in place money priority can lead to bankruptcy.
It is imperative to answer financing questions ranging from: where am I going to get money to fund this business? What is the cost of staying in business? Who are my financing partners? What is the cost of starting this business with my proposed number of employees?
Lack of Business Plan & Business Model Failure
The success of a business is most times not by chance. It is true that there are some companies that started without a well-thought-out business plan and are still in business today. However, it is risky to be in business without a careful, methodical, business plan.
One of the most common causes of start-up failure is that entrepreneurs are too optimistic about how easy it will be to acquire customers. They assume that because they will build an interesting web site, product, or service, customers will beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer
I see the vast majority of entrepreneurs failing to pay adequate attention to figuring out a realistic cost of customer acquisition. A very large number of the business plans that I see as a venture capitalist have no thought given to this critical number, and as I work through the topic with the entrepreneur, they often begin to realize that their business model may not work because CAC will be greater than LTV (Life Time Value).
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Failure to Meet Customer Needs
A common business mistake that leads to business failure is when customers’ needs are not identified or fulfilled. It is important to realize that the customer keeps you in business and can in the same light put you out of business. If you fail to listen to them, your business can fall through. Most business ideas come from an entrepreneur spotting a need for a product or service, however, no matter how good your idea may be no one will buy it if they don’t want it or believe they don’t need it.
Most of the time, the first product that a start-up brings to market won’t meet the market need. In the best cases, it will take a few revisions to get the product/market fit right. In the worst cases, the product will be way off base, and a complete re-think is required. If this happens it is a clear indication of a team that didn’t do the work to get out and validate their ideas with customers before, and during development.
Knowing and understanding customer needs is key to business success and an entrepreneur must constantly find out customers’ needs, welcome positive and negative feedbacks and reviews, carry-out surveys, and collate customer data.
Regardless of the industry, failure is the result of either the lack of management skills or lack of proper capitalisation, or both. Our experience working with business owners show the importance of having the right management skills and financing in place.
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