Starting a business can be both exciting and rewarding, but there are many challenges and pitfalls that can derail you. In this post we look at the main reasons why businesses fail and the actions you can take to give your business a better chance of becoming a success.

Why do businesses fail

  1. No product-market fit
  2. Not understanding your market or customers
  3. Wrong strategy
  4. Failures related to people issues
  5. Poor financial management
  6. Ineffective sales and marketing

 

Why do Businesses Fail – The statistics

50% of new businesses fail within the first 5 years

US Government statistics indicate that around 50 percent of new businesses fail within the first 5 years. For the period 2010 to 2020, US business had a 21% failure rate by the end of the 1st year, a 31% failure rate by the end of the 2nd year, a 49% failure rate by the end of the 5th year and a 66% failure rate by the end of the 10th year. These figures detail the failure rates of new businesses as a whole, including freelancers, small or consumer services businesses such as local shops and restaurants, as well as innovative and scalable startups. The figures remain fairly consistent year on year, so are a good indicator of business failure rates.

New business failure rates tend to be similar across industries, although looking at the best and worst sectors, 60% of Healthcare and social services businesses were still going strong after five years of operation, whereas, only 35% to 40% of businesses in construction, transportation and warehousing survived for five years.

More than 80% of scalable startups fail 

A regularly quoted figure is that 9 out of 10 startups fail, you will also hear the figure of an entrepreneur’s chances of success being about 20%. These figures tend to relate to innovative and scalable startups who have the biggest upside potential, but also the biggest risk for failure.

High growth startups that show significant potential are often funded by venture capitalists. About 75% of these VC backed startups never achieve significant growth or profits, with 30-40% losing the whole initial investment. Venture capitalists bet on the 25% of companies that become successful making high enough returns to cover for the 75% that don’t. This shows that throwing money at a problem isn’t always going to guarantee success.

While the statistics can be interpreted in different ways the key point is that starting a business is risky with about 50% of all businesses and more than 80% of scalable startups not making the cut. So lets look at the main reasons why businesses fail and the actions that founders can take to mitigate these risks.

 

NO MARKET NEED FOR or POOR EXPERIENCE WITH THE PRODUCT

Problem – Solution fit and Product – Market fit

The No. 1 reason for businesses to fail is not having a market or customers for your product or service. Some entrepreneurs start a business by solving a problem they are interested in rather than a problem that serves a market need. Not having problem-solution fit or product-market fit means you build something nobody wants.

Don’t start with a solution and then go looking for a problem. Identify problems or an unmet need in a market you know something about and that you personally want to solve. Once you have identified the problem to solve, determine which customer segment regards the problem as significant enough that they will pay to have it solved. It needs to be a top-of-mind problem, as your biggest challenge could be the inertia of the customer where they choose to do nothing, if the problem is not important enough for them to take action.

Make sure that you validate your assumptions and do customer research before spending a lot of time and resources developing the product or service. De-risk through rapid experimentation and pre-selling to get a feel for the likely demand and to get feedback from customers. This could be through platforms like KickStarter, Product Hunt, or online communities. Other options include developing a basic website and marketing to potential prelaunch customers, developing a prototype or launching a beta version at a reduced price.

User experience 

Another commonly stated reason for failure is that the design of the product or service failed to take into account the users wants and needs, isn’t user friendly or the customer service is poor. Make sure the user experience (UX) is optimised, particularly where customer retention is important, such as in a subscription business. Put sufficient resources towards providing a high level of customer service. Measure your user experience as a key business metric and look for trends. Build good relationships with your customers.

Getting the timing right

Timing can be important in some markets, releasing your product too early, before it is likely to be adopted by customers or too late when customers are moving on to something new. Being first to market isn’t always the best option, particularly where you are developing a new category or you have to educate customers. Coming late to market when there are many competitors can work where you learn from the existing competitors and develop a clear competitive advantage. 

“Every sale has five basic obstacles: no need, no money, no hurry, no desire, no trust” – Zig Ziglar

NOT UNDERSTANDING YOUR MARKET, CUSTOMERS OR COMPETITORS

Define your customer

You need to be clear on who your primary customer is. It is generally advisable to focus on a smaller niche set of customers when you are starting a new business. Niching allows you to get noticed and get traction. Trying to tackle the whole market rather than a niche is often cited as a reason for failing.

Get out and speak with your customers. Understand as much as possible about your customer’s behaviour. What are they currently doing to solve this specific problem and where do they feel the most pain in the customer journey. Understand the underlying motivation and context, both emotionally and functionally, and test their willingness and ability to pay. Speaking with potential customers can be difficult for some businesses but this step is really important.

Understand your market

Startups need to understand the market size and trends. You need to determine if the niche market is big enough with enough customers to achieve your financial goals. Understand the trends in your target market, is it growing slowly or quickly, or is it in decline. Undertake upfront market research to identify any barriers to entry such as high degrees of brand loyalty to existing companies, high customer switching costs, potential patent infringements, high start-up costs, economies of scale or regulatory hurdles. Understand which permits, licenses, or registrations you will need for your business.

The Competition

Getting outcompeted by the competition is a common cause of failure. Some failures occur because there was simply too much competition in a price sensitive market or where you don’t have a unique selling point. Be aware that once a trend becomes hot more entrants are likely to enter that space.

Consider the possible reaction from incumbents. Some sectors or regions are so cutthroat that competitors are willing to win at any cost which can be difficult to compete against. Will competitors lower their prices, mount a legal challenge, spend more on marketing or launch a new product or service that overtakes your competitive advantage.

Assess the industry structure with a framework like Porters 5 forces and undertake a competitor analysis. Protect your intellectual property with patents, copyrights, trademarks, confidentiality agreements, etc. Always hold yourself to an ethical standard in any tactics you use to compete.

Expanding internationally

Many businesses have been burned when they expanded internationally. If part of your strategy is geographical expansion you need to really understand the local market and customers. What works in one location may not work in another.

Confirm that international expansion is a business priority with greater returns than new product development or selling to new customers in your existing market. Make a realistic assessment of the benefits and risks of international expansion. What assets and capabilities you can bring and are they sufficient to overcome the friction in establishing yourself in an overseas market. Check that the revenue potential is large enough to remain attractive and not become a burden or distraction on the overall business. 

Develop a sequence plan defining which countries and regions to prioritise. Fine tune your blueprint in one region that has lower risks before expanding further. Ensure that your home market business has ironed out all the bugs and has established a repeatable process. Hire the right person to lead your expansion, someone who knows the local culture and consider the right balance between central and local decision making authority. Create the tools and culture that allow effective communication. 

Undertake tests to confirm that there is a local demand. Consider your route to market, it may be better to work with a local partner or distributor. Decide if you should localise your products and how much autonomy to give to your local team or supply chain partner. There is also an administrative burden to understanding local laws and managing remote teams. 

 

WRONG STRATEGY

Develop your strategy & business model

It is important to put a plan in place before venturing into business. Develop a business plan that outlines your goals and strategy with the appropriate level of detail for your business. The plan can include the results from market research and customer surveys, state the hypotheses and assumptions made, the costs and inputs needed for the business measured against forecast revenues, sales & marketing tactics, and timelines. The outputs from business plans are often wildly inaccurate, but the process of planning is essential.

Your business model will define how you will make a profit through your go to market and supplier strategy. Determine whether a network of partners, affiliates, retailers or distributors or direct-to-consumer or a brick-and-mortar approach will be more profitable. Don’t become dependent on a single customer or single source provider. Look to build a scalable and repeatable business model that doesn’t depend on you.

Scaling the business

Scaling up too early has been cited by failed startups as a cause for their business going under. Don’t judge success on securing sales with the early adopters, the majority of buyers may have different buying preferences. At the startup phase keep staffing low, outsource if needed, only grow staffing levels once revenues are assured. A growing company has increased complexity, your structures and processes need to adapt to the complexity.

Get the pricing right

Pricing depends on your market context. It is an art that you need to consider carefully ensuring that prices are high enough to eventually cover costs but low enough to bring in customers. Try not to compete on price, instead try to add value to your customers in a way that is better than competitors. Understand the risks of any freemium business models.

Knowing when to pivot

Failing to pivot when it has become apparent that the direction the business is taking is not working, is a common cause of business failure. Your business needs to be flexible and adapt to changes in the market. Monitor the market for trends and your competitors initiatives. While it is impossible to put contingency plans in place for major events like Covid-19 you can create an agile culture or mindset that allows you to pivot quickly when a major event occurs.

The 8 Steps to Building a Successful Business

Learn the practices used by successful Entrepreneurs

FAILURES RELATED TO PEOPLE ISSUES

While it could be argued that all failures ultimately lead back to people through their actions, inactions or decisions, some failures can be directly related to people issues or the founders themselves.

Business skills 

A lack of knowledge in the market sector, of the customers, or in technical, sales & marketing or business skills can all lead to failure. In some cases technical knowledge can be critical however the lack of business skills is often the bigger reason for businesses failing. It is often better to start a business in an area where you have experience, or if this is not possible, seek a cofounder or bring in a coach or advisor with the experience needed.

Business success if often dependent on the skills of the founder. First time entrepreneurs have higher failure rates. Founders who have previously had a failed startup have a 20% higher chance to succeed in their next venture. Keep learning, educate yourself or seek the help of a business coach or consultant. If one founder is headstrong have a partner that is able to provide sanity checks on each decision made. If the business grows is the founder able to adapt sufficiently to the changing demands or does the business need a different type of leader.

Ability to execute

Some entrepreneurs are very creative but lack the ability to execute. It is important to have the self-awareness to know where your strengths lie and to compensate for these by assembling a team or developing your skills in these areas of weakness.

Make sure you have the time to devote to your business. Be clear on the choices and sacrifices you have to make in your personal life. Not having enough time to complete critical tasks and falling behind schedule can leave you feeling frustrated with yourself and impact on your motivation.

Entrepreneurs often try to take on too much themselves. Doing activities outside your expertise or that aren’t a good use of your time won’t be good for your business. Develop the day-to-day habits needed to run the business, define what you need to delegate in an outsourcing plan and put a time management system in place that suits the way you work. Organize and prioritise your time, staying focused on the work that really matters. A half-hearted effort or not wanting to get your hands dirty, rarely leads to success.

Build the right team

A key risk is not having the right team. There is contradictory evidence of the benefits of being a solopreneur over having co-founders. Where additional resources are required build a diverse team with experience in the range of skill sets essential to the success of your business. Hire a team that has the same vision, that are a good fit but are also able to positively challenge the direction of the business. Bring in employees that are flexible as they may have to function in multiple roles during the startup phase‎. Hire slowly. Fire quickly.

Friction within the team or between cofounders can be a common reason for businesses to fail. It can be beneficial to put a cofounders agreement in place. This can cover areas such as splitting responsibilities, detailing what happens if one founder is putting more sweat equity into the business, vesting arrangements and mechanisms for decision making and feedback. A cofounder needs to be someone you want to spend a lot of time with and someone you trust. Consider having a trial period. Disagreements with investors can also derail a business so try to find investors that are a good fit.

Not having a strong network or investor connections, or in some cases not properly utilising the network you do have can be critical in some businesses. Manage your network proactively. Learn from other entrepreneurs who are successful. Your support network can include your family or having a mentor or coach. Networking can land you a new investor, a great employee, a new customer, or a great mentor.

Motivation and mindset 

It can be difficult to maintain your passion for the business. Many founders will have doubts around what they may have to give up in their personal lives to build their business, or if they want the hassle involved with having investors or employees. Make sure that your family are bought into the venture so that they are supportive when times get tough. Startups take a lot of effort, if you’re not building something you have a passion for, it’s difficult to see it through.

Founders can become discouraged when their business hasn’t meet their expectations. Some entrepreneurs may prefer the buzz of starting something new to managing or scaling a business. Again be self-aware of what you want to achieve by starting a business and have a plan in place whether that is an exit or where appropriate bringing in a management team. Overnight success is rare. Entrepreneurs need the grit and persistence to see through the tough times.

Even getting to the stage of launching a business can be challenging. Having an idea is one thing but many good ideas never become a business because of issues associated with self-belief, mindset and execution. There aren’t any statistics on these failures that have never progressed to forming a business but they are likely to be much higher than for businesses that actually launched. Seek help if mindset issues are holding you back.

Losing focus, procrastination, imposter syndrome and a fear of failure are common problems with entrepreneurs. New entrepreneurs may feel the urge to jump at every opportunity that arises, getting side-tracked by shiny object projects and not seeing the current opportunity through to completion. Perfectionism can hold you back believing that you need more market research, more knowledge or have a better business plan before you take the next step. What often separates those who achieve success from those who don’t is what they do with those thoughts and feelings when they occur.

The tendency for entrepreneurs wanting to do or control everything can lead to burn out. Entrepreneurship is a lifestyle not a regular 9 to 5 job. Lack of time, stress, or a poor work life balance build up on your wellness over time. Consider ways to delegate, outsource, or partner. Create better systems that solve recurring problems. Celebrate your wins. Look after your health. You can be the most successful person in the world, but that won’t matter if you don’t have your health. Too many entrepreneurs try to push through and become overwhelmed. Failed entrepreneurs often question why they didn’t seek support earlier.

Failure is not the regret that haunts most people; it is the choice not to risk failure at all.” ― Dr. John Izzo

POOR FINANCIAL MANAGEMENT

A common reason for businesses to fail is poor financial management.

Funding 

Entrepreneurs need to plan how the business will be funded. Are there any government grants available for your startup. Are you bootstrapping using your own funds or those of friends and family. How much money are you willing to put into the business. Do you need to raise equity or debt. Will your business look attractive to investors. If you are going the investor route start with the end in mind defining your exit plan.

If you are currently employed do you quit your job to focus on the startup or is it better to keep your main source of income. Establish trigger points that indicate when you can go full time in the business, for example when you have achieved sufficient revenue or profit traction. What is the risk of starting a business on a parttime basis, you might need to consider if cofounders or outsourced services are required. Calculate the level of income that you as the founder need to survive. When and how much you will pay yourself. Dividends may offer a tax advantage over paying yourself a salary but you need to have retained profits in the business to pay dividends. What happens if the hoped for profits take much longer to materialise.

A financial risk can be a lack of investor interest. If your business needs funding to succeed you need to take very deliberate steps to ensure that you become attractive to investors and establish a network that helps you to reach out to them. If your target is to scale the company don’t worry too much about diluting your percentage ownership. Don’t wait to build your network, securing the investment may take longer than you have planned. If you are seeking funding hire a business lawyer who specializes in startups to put the contracts in place. Be aware that the pressure from investors may push you away from your core value proposition or initial purpose.

Financial management 

It is important to spend your funds in the right areas. Focus on expenditures that can create revenues and tightly manage any overheads. Build a financial model and establish a budget. Add a reasonable risk contingency to your budgets. Have good reasons before you make any unbudgeted expenditures, seeking savings elsewhere. At the startup phase every cost should be challenged. Implement a system for forecasting to increase the accuracy of budgets.

Understand the key financial metrics for your business. At the most basic level Revenues minus Costs equals Profit. The focus has to be on generating revenue, consistently acquiring new customers, measuring the cost of acquisition and ensuring that the revenues generated from each customer are greater than the acquisition cost.

Understand your fixed and variable costs and your break even, how many sales you need to cover the fixed costs. Be able to explain your gross and net margins, and your unit economics. Calculate your runway, the time you have before you run out of funds and how many months to reach positive cash flow. Over time understand the lifetime value of each customer and monitor which products or customers make the most profit. Undertake a sensitivity analysis, for example what would be the effect of a 20% reduction in sales from those projected or 20% higher production costs.

Track and monitor all spending. Regularly review where you are making money and losing money in the business, which customers are profitable and which ones aren’t. You need to have a process in place that tells you the money you have coming in and going out, and your cash position. Credit-check all new potential customers. Don’t be too generous with your credit terms. Stay on top of customer payments, with a system for tracking and following up on late payments. Make sure that you leave money aside to pay your corporation and sales taxes.

You need to be clear on who is responsible for managing the finances. While some aspects can be outsourced to an accountant you need some form of metrics that you can review which indicates your current financial position. The accounting software packages available today are worth the expenditure, but at a minimum track your finances on a spreadsheet. Be aware of the requirements for financial records and tax returns. Put your insurances in place.

The Covid-19 pandemic has highlighted the need to plan for outlier events. This is difficult but develop a risk register, consider ways to mitigate the risks, such as having insurances in place and have contingency plans for risks that cannot be mitigated. Put funds aside, both personal and business, in an emergency savings account. Think through a fall back plan to start earning income should the business fail, such as returning to full time employment.

Businesses can fail even if they are successful but expanding too fast. This can cause businesses to run out of cash, even if they are profitable. If you are growing fast take extra time to manage your cashflow and be strong enough to turn down revenues if the business is becoming too stretched. Provide incentives for early payment. Take advantage of invoice financing.

Put a long-term plan in place for your personal finances. Get the money you earn from the business to work for you. Invest in an asset or a pension plan. 

“The past can hurt. But you can either run from it, or learn from it.!”

INEFFECTIVE SALES & MARKETING

Know your audience

Know your target audience, how to get their attention and how to convert them into leads and ultimately customers. Understand their customer journey. Don’t establish your business in a bad location if your business relies on foot traffic. Have an online presence and consider if e-commerce will help sales.

Craft the right messages

Craft a value proposition that establishes an emotional connection with the customer and differentiates your offering from competitors. Don’t focus on marketing features, promote the benefits or outcomes to the customer. You need to be careful not to spend too much on marketing before you nail down who your target customer is and get the customer value proposition right. 

Choose the right tactics

Have a clear plan for testing the range of sales & marketing tactics that are appropriate for your business. Once you identify which tactics are the most successful, double down on those and work on optimising the costs of customer acquisition. When you have the financial capacity explore other tactics.

Building a brand can set you apart from competitors. But branding takes time and money, does your business have the resources to brand build or should you focus, at least initially on achieving direct sales. 

Social media and pay per click platforms can be good for lead generation and community building, but remember that the platforms can change the rules or algorithm, or may decrease in popularity over time, so don’t rely on building your audience on a platform that is outside your control. Drive traffic to your own assets such as your website and email list.

Achieve the right balance between new customer acquisition and customer retention. Acquiring a new customer can cost five times more than retaining an existing customer. The success rate of selling to a customer you already have has been shown to be in the order of 60-70%, while the success rate of selling to a new customer is 5-20%.

Develop a marketing process

Put a marketing process in place, one that is consistent and preferably as automated as possible. Measure each stage of your marketing funnel. Where are the leaks that are stopping conversations. What marginal improvements can you make at each stage of the process. 

Poor marketing is a common failure among technical founders who don’t relish the idea of sales and marketing, so they avoid it. Consider outsourcing the marketing function if your marketing efforts are starting to fall behind.

 

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Every entrepreneur wants to have a successful business. You basically have a 50/50 shot of surviving past year 5, but don’t allow that to discourage you from pursuing your dreams. Founding a business is too good an opportunity to pass up.

It is rare to face a problem that another company hasn’t already faced. You have the opportunity to learn from their mistakes. Give your business the best chance of success by putting the business foundations in place, having the right product to solve a specific problem, understand your customer and verify product-market fit through customer research. Develop a business model that will provide a profit. Put people in the right roles or outsource, manage your finances tightly, test your sales & marketing, and pivot if required. Continuously learn and adapt, seek help with any mindset issues.

Don’t struggle through trying to figure it all out yourself, invest in developing your entrepreneurial skills, work with a coach, and network with and learn from other Entrepreneurs. If you build these lessons into your business and you will end up with a business that you will be proud of.

 

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Starting a Business is hard – that is why The First Time Entrepreneur provides online business training that guides you through a step by step process and shares the best practices used by successful startups, giving you the clarity and confidence to start and grow your business.

Where you need additional support, we can work with you through our coaching programme or do tasks for you through our outsourcing and consultancy.

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