Many entrepreneurs are convinced their product will take the market by storm, but with 99.3% of the private sector made up of startups, it’s a crowded field. Consequently, the dreams of success rarely come to pass, with an estimated 9 out of 10 of startups failing.
This statistic may be hard to swallow for those new companies who believe they have a solid business model and a product that’s destined to sell. However, there are plenty of factors that could leave even the most promising looking startups destined for disaster. Here are five of the most common reasons why startups fail, and some tips for trying to avoid these issues.
- Unnecessary spending
Running out of money is one of the most common reasons for startups to go under, and is often the result of poor financial planning, or assigning funds to things the business doesn’t need. Given that very few startups are likely to be profitable in their early stages, it’s vital that a company makes every effort to save as much money as possible.
For example, new companies may think they need to establish themselves in a swanky office space that reflects their brand. Though a roomy work environment sounds appealing, finding the right premises is far more important later on in a company’s life cycle. Savvy business owners should work out how much office space they actually need in order to save money on rent and bills.
Startups could also be guilty of overhiring, and spending too much on the payroll. Even with a detailed business plan, it’s difficult to know exactly how many employees will be required when a new business is just getting started. It’s therefore preferable to take on minimal staff until all business operations have been confirmed. A successful entrepreneur will take every opportunity to look for opportunities to save, and only pay for the essentials. The best way to avoid financial difficulties is by formulating a detailed development roadmap, which lays out how to achieve all the tasks and goals of the business.
- Not reading the market
Being unable to serve the needs of their target market has been cited as the top reason startups fail, with 42% of companies believing this factor that led to their shutting down. This frequently happens when too much focus goes towards the business plan, rather than considering exactly how the product will solve large-scale consumer problems.
Unsuccessful business owners falsely assume that people will be interested in what they have to sell. No matter how interesting a product may seem in-house, it will only take off if it meets the needs of consumers. Market research and focus groups are vital, as these strategies reveal whether there will be sufficient demand for the product, and offers a soft launch to track customer opinion. Startups can never hope to survive without engaging with potential customers and embracing feedback.
- Hiring the wrong people
Putting the right team together is crucial to a startup’s survival, but founders will often recruit a group of people who don’t provide the skills and structure the business needs. This could occur by hiring friends and family members who are unqualified for their roles, taking on staff who are at odds with the company culture, or failing to strike a balance between experience and fresh talent.
According to Sam Altman, president of startup accelerator Y Combinator, new businesses should aim to have two or three co-founders. The perfect founding team is said to have three key roles—the visionary, the hustler, and the hacker. This breaks down into having a figure who believes in the business and inspires the team, a person responsible for details and day-to-day operations, and somebody responsible for the tech and hardware required for the product. Generally speaking, the best teams are diverse and full of complementary figures who trust and support each other.
- Underestimating the competition
Though startups are often advised to focus on their own business and not be distracted by the competition, failing to acknowledge others in the market can be disastrous. A new brand may struggle to compete with another company doing the same thing. Alternatively, if a startup manages to build a better product than previous options, more businesses will be likely to try and eat into its market share. As such, entrepreneurs need to think about how to beat the competition.
Competitor research is vital for startups to identify what they can do that isn’t currently available to customers, or how they can set themselves apart from other companies in order to win a profitable market share. Paying close attention to the competition means entrepreneurs will be in a better position to learn and adapt accordingly, improving their product and their overall business as a result.
- Scaling up too quickly
Many startups that believe they’re doing well often overestimate their success, and decide to expand prematurely, whether by renting a bigger office space or hiring too many members of staff. Likewise, investing too heavily in a product before the market is ready, or putting more money towards marketing before the target customer has even been identified can actually be the root of a business’s downfall.
Startups can only grow once they have established how their product will work in their chosen sector, and how they can operate at the minimum loss while continuously acquiring new customers. Until then, sustainable growth should be an SME’s primary focus. This can be achieved by ensuring existing customers are understood before new ones are chased, improving the product, only hiring only staff as needed, and only spending funds on essentials.