The 7 Reasons Why Startups Fail and How To Avoid Them

August 21, 2015

9:00 pm

Statistics released by Forbes magazine revealed that 80% of startups fail within the first 6 months of operation. The data goes on to point out that only 30% of small businesses survive for at least five years. The reasons for failure of startups are numerous and unique to a specific business or industry. The 7 reasons why startups fail outlined in this article apply to all startups regardless of the industry or business model.

Related- Warning: 3 Reasons Your Business Might Fail

The firm products don’t solve unique market needs

Entrepreneurship is all about innovation, creativity and finding new ways to conduct business in a faster, cheaper and more efficient manner. When you produce a product that can solve a certain human need, there will be a ready market for your product hence you will succeed. Some of the most successful entrepreneurs like Steve jobs succeeded by solving a human need. Before implementing your idea, invest in market research. Survey customers to understand their problems and design a product that seeks to solve this problem. A successful entrepreneur walks a thousand miles in the shoes of the customers to ensure that innovation solves everyday challenges.

Wrong motive for starting a business

This is the most common cause of failure by startups among the 7 reasons why startup fail. Most entrepreneurs fail because they invest in business for the wrong motive. Money is good and in most cases, it is the reward for hard-work, but it is also a major cause of business failure. Starting a business because you are passionate about your idea, and you have the drive to solve a human need will lead to success.

Under capitalization

Bloomberg magazine released a survey indicating that 60% of failure by startups is attributed to under-capitalization. Most entrepreneurs start a business expecting it to generate cash flow immediately. However, it takes time to produce a product, get a distribution channel; conduct marketing campaigns before the product start generating cash flow. Hence, proper financial planning should be done to keep a healthy cash flow until the product begins to sell.

See also-3 Keys to Building Great Financial Models

Lack of business plan

A business plan is a road map guiding an entrepreneur through every stage of the business. It outlines the business concept, the product, the target market, capital outlay and how to raise it, marketing strategy and exit strategy. The business plan forces an entrepreneur to conduct a SWOT analysis of the business hence thinking about business challenges.

Failing to plan is planning to fail

Hence, utilize the many available online resources to write a business plan. In some cases, a professional can be helpful in ensuring you keep the targets and forecast realistic.

Competition

The biggest challenge to startups today is globalization. With the world becoming a global village, many multinationals have operations in almost every part of the world. With adequate resources, best human capital, effective marketing strategies, advanced technology and strong business partnerships, it is impossible for startups to compete favorably with such companies. The only way to beat these brands is by producing high quality and innovative products. Find a weakness in their products and capitalize on it.

Poor allocation of resources

Startups are faced with a challenge of constrained resources. Effective allocation of resources can make a difference between a successful entrepreneur and a failure. There is a need to distinguish between what you want and what you need. For instance, when starting a business, if you have to choose between an office and employing staff, which one should you pick? Poor allocation of resources’ cause failure when there is a case of misplaced priorities. With constrained resources, they should be utilized where they are needed the most.

Having the wrong people in your team

Human resources is the most important determinant for the success of a business. The staff have a direct contact with the customers, suppliers and other stakeholders. If most of your staff are demotivated, they will not serve customers properly hence losing customers. Skills, qualification and experience are important in human resource but at times the best staff are not the most qualified or the most experienced. Hence, choose dedication, passion and creativity over experience and qualification to get the finest team.
The 7 reasons why startups fail outlined in this article are not the only. As an entrepreneur, learn from the mistakes of others and avoid failure because of such reasons. Exercise patience, be dedicated and never give up to succeed.

Image Credit: Flickr/Ricky Romero

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Award Winning Entrepreneur .Founder & CEO Of Firm Luxury Media. I am the CEO/Founder of Technobezz . I Mainly Share Solutions To Problems.I exhibit clear authority and expertise in Information Technology.

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