Whether 90 percent of startups actually fail is a popular topic of debate. What’s well-known, however, is that there are a multitude of reasons why many startups crumble, with a few culprits guiltier than others. The good news? You can save your business from the doom and gloom by understanding the top 5 reasons startups fail.
No Market Need
Here’s a harsh truth: everyone thinks their product idea is cool. But how many unborn products actually solve a major market need?
In order to sell a product, you’ll need a population to market it to. Highly universal populations (like “cyclists”) are tricky to grasp; slightly narrowed ones (like “road cyclists on a budget”) are easier. Tiny populations (like “road cyclists who dislike wearing helmets but are totally fine wearing cool baseball caps”) are often too small to be worth your time and money . . . but just in case, don’t steal my idea for a hard-yet-fashionable baseball cap that protects against head injuries.
Starting your own business doesn’t only require identifying a target population. You have to ensure that population is experiencing the same pain point you are. If no one but you wants or needs a baseball cap helmet, you’re out of luck.
Duh, you’re probably thinking. Lack of capital is the biggest reason many businesses don’t come to fruition in the first place. But lack of capital isn’t the only money-related reason many startups fail. Indeed, too much money (usually a result of excessive seed funding) can make entrepreneurs and their startup teams careless. Excess capital often sends budgets out the door in favor of flashy offices, extra advertising, and speedy hiring. Because hey, won’t it be worthwhile in the long run?
Of course, insufficient capital is a common problem as well. Bootstrapping just isn’t an option for many more “expensive” startups, forcing owners to rely on loans and crowdsourcing. Debt deepens until entrepreneurs have dug themselves into holes, and even carefully-budgeted savings and crowdsourcing cash burn away.
So if every route results in a dead end, where do you go? Caution goes a long way. Cushioning your budget—that is, overestimating how much you’ll spend on a certain category—and stashing away cash for the winter can help save your business from financial demise. And when you find yourself with a few extra dollars, don’t let them burn a hole in your pocket. Circulate revenue back into your business, at least until you become confident that your startup has a steady flow of income.
Few businesses have become household names overnight. Those who attempt to achieve such a feat are usually knocked back on their heels because they aren’t truly prepared for the big “boom” they aimed for. Essentially, most businesses will fail, not scale, when they aren’t yet ready to do the latter.
There’s no single formula for determining when your startup is ready to scale, but a few factors tend to come into play. Some recommend piecing together the perfect team before attempting to expand. Others say to perfect your company’s mission statement and internal ethos. Guaranteeing dependable, positive cash flow is a common one. Whether you’re racing the competition or rushing to take advantage of a new industry, stop and take a breath—you have more time than you think.
No Business Plan
Hope and faith are essential to the startup process, but they don’t constitute a business plan. If you want anything to lean on when the going gets tough, you’ll need to write a few things down. Business plans are also crucial for those seeking seed funding from investors otherwise unconvinced.
Don’t freak out just yet. Plenty of entrepreneurs are moving away from the full-stack business plan and opting for the one-pager instead. In the book I share with my brother (Small Business, Big Vision), we dive deep into what makes or breaks a one-page business plan, but to start, you only need to know a few things. Your one-page business plan should absolutely fit onto a single page, regardless of how many visuals or paragraphs are involved. You should also be able to convey your target audience, business model, mission statement, and required funding in only so many words. Being able to consolidate your business summary will prevent you from stumbling over the multitude of hurdles startups tend to experience during their first few years.
The Wrong Team
Some say the wrong team is the only reason startups fail, and that any other “cause” is just a symptom. If you think about it, it’s kind of true: uncoordinated teams can end up wasting capital, botching a business plan, or pushing a startup to scale sooner than it should.
Either way, the wrong startup team often sparks a slow and grueling demise. And it isn’t just a hiring issue—even existing teams can spoil from the inside out. Start by being super picky with whom you hire and cultivating an honest, open work environment, even if that means firing fast. When the time comes for you to make executive decisions, don’t let your team find out on their own. Finally, bring doughnuts to the office every now and then. It can only help to boost morale.
Your startup doesn’t have the time (or money) to make and learn from every mistake. Being aware of the top 5 reasons startups fail may just save your business.