Unfortunately, businesses fail, and even big companies can shut down (Theranos, once valued at $9 billion, being a recent cautionary tale). With only half of businesses surviving the first five years, it’s important to understand why the other half failed so that you can avoid some of their common mistakes.
When beginning a business, drive and passion can be excellent motivators. However, even this passion will not lead your business to success if you don’t take the time to prepare and avoid pitfalls. If you allow your passion to lead you blindly into costly mistakes, your business will be at risk of failure.
Below, we’ll look at some of the reasons for failure dug from the startup graveyard to help new business owners set themselves up for success.
How do you know a startup is failing?
Sometimes, companies need to pivot and adapt to market conditions to survive. Even some of the biggest names have gone through necessary transitions. For example, Amazon started as an online retailer for books, and now you can find nearly anything on the site. However, a successful pivot requires recognizing key signs that the business has begun to fail.
Remember, recognizing that something has gone wrong with your business’s projected path is not a sign of failure. Rather, the savviest business leaders recognize that they sometimes have to make adjustments to keep their businesses on the right track. Identifying the signs of failure will give you a chance to save your business and avoid losing your entire investment.
Some signs include:
- Lack of demand for your product. If not enough people express interest in what you sell, you’ll want to reevaluate your process.
- Costs are too high, and a profit isn’t being generated. Although your product might be popular, if the costs to create the product and manage your business are too high compared to what you bring in for each sale, you won’t generate profit and grow your business.
- Employees leaving. Employee retention offers a measure of success. Your employees might be the ones in front of customers making sales. If they don’t believe in your product, they won’t do the best job selling.
- Feeling mentally trapped. Although many entrepreneurs find some parts of the business development process stressful, there is a difference between feeling stressed and mentally trapped. Trapped indicates that you don’t see a way out, and you may begin to flounder.
- Not working on your business for the right reasons. If you’re not working on the business for the right reasons, you’ll quickly find that your business will fall further behind.
- Not asking for help. Every entrepreneur seeks advice and information from others, whether a co-founder or other professionals who’ve successfully navigated this path. Not asking for help can be an excellent indicator that your heart is no longer in the business, and you’re not seizing opportunities that could lead to success.
If you begin to see any of these red flags, it may be time to reevaluate your business. See if you’ve fallen into any of the following reasons that businesses fail.
8 Reasons Startups Fail
Although every business is unique, it’s easy to uncover patterns in why businesses fail. Learning from other people’s mistakes provides valuable opportunities for new entrepreneurs to set themselves up for the greatest chances of success. People can read the post-mortems of past businesses to learn more about why their predecessors failed, so they can make the optimal choices that will help them thrive.
We’ll look at eight key areas where businesses often come up short:
- No demand for the product
- Not enough funding
- Issues with team management
- Business model failure
- Bad marketing
- Legal challenges
- Not understanding the target market
- Burning out and losing focus
No Demand for the Product
If the market doesn’t need the product, you’ll have no one to sell to, and the business won’t succeed. A lack of demand for the product is the most common reason businesses close their doors: Nearly half of businesses find themselves facing this common problem.
Only businesses born of careful market research and entrepreneurs who understand how their proposed product or service will meet the target market’s needs will thrive. Those interested in starting a business need to make sure they understand:
- The needs of the customers within the target market
- The products and services on the market and how well they fit the needs of customers
- Gaps in the ability of the current market products to solve the needs of consumers
- The number of consumers likely interested in conducting this product hunt
Determining market demand is a step that entrepreneurs should take before creating their business and periodically throughout the business’s life. Regularly assessing and understanding trends in the market and changing customers’ interests can help brands create helpful products that drive sales.
If you’re a struggling business, look at your sales numbers. Speak with customers in your pipeline who didn’t convert about why they didn’t go with your product. (Tip: Offer to compensate them for their time, whether that’s by offering advice of your own, taking them for coffee, or sending a gift card of a small amount. This small cost to you will earn you very valuable information.)
Continue to conduct market research to see if your marketing targets the right population and how you can shift how you’re developing your product, your sales approach, and any strategy behind your marketing so that they align with what people want to purchase.
Not Enough Funding
Running out of funding is another reason businesses fail. In fact, 29% of businesses don’t have the funds they need to continue. Without money, it becomes impossible to maintain the organization. This is why business owners must keep careful records of their finances before it reaches that point.
There are various resources that new businesses can use to accurately and quickly track their finances. Bookkeeping software and tools can provide many benefits, including more in-depth reports and making it easier and faster to track different expenses. The Small Business Administration (SBA) also has resources to help you begin tracking your expenses and finances, including access to a balance sheet you can use to get started.
To keep your business afloat, call on different sources to raise funds. There are several loan and grant options available for people from different backgrounds, which you can learn more about here. You can also take out loans from banks or non-government sources and find investors who see your vision and believe that your business has what it takes to succeed. They can help you secure venture capital to run the business.
Issues With Team Management
Those on your team also play an important role in the success of your organization. A motivated, hardworking team will accomplish far more than a team plagued by poor leadership and high turnover. No business owner can do all the work themselves, which means that learning how to build an excellent team should be prioritized.
Nearly a quarter of small businesses fail due to poor team development and management. To prevent your organization from joining this statistic, here are some strategies for hiring the best team, even if you’re still looking to make your first few hires:
- Get to know the person outside of the resume. What are their long-term career goals? How do these fit with the goals of your organization?
- Look not only at the current skills but also soft skills and personality. You want personalities that fit well together and complement each other.
- Look for evaluations you can do beyond resumes, such as personality tests and skills tests, that will help you see how well this candidate fits your team.
- Let candidates get to know others at your organization, such as through separate interviews or lunch gatherings, especially if you’re still hiring your first few “core” employees at your small business.
Once you make a hire, prioritize communication and team building. Nurture a business culture that prioritizes communication and innovation by encouraging questions. Provide clear instructions and the flexibility to get the job done the best way they know how — with an eye on the result rather than micromanaging the process. Even during the COVID-19 pandemic and remote work, working together helps businesses manage their loads more effectively, especially if you run a microbusiness (a business with fewer than 10 employees).
Business Model Failure
It can also be helpful to read about the business models that have failed in the past. You might find that some businesses narrowed their scope too much, such as specializing in offering graphic design services to only local construction companies. There was a limited population of potential clients, and by the time the entrepreneur realized the problem, they didn’t have the resources to expand their reach far enough.
A freelance writer specializing in local, small businesses may have realized they didn’t do an adequate job convincing prospective clients about the value of their services, and the businesses only saw a price tag that appeared too steep of an investment. Thus, the freelance writer’s pricing didn’t fit their market.
Looking at different business models can help your organization spot problems and give you the chance to make a change.
Having a good plan for reaching customers and keeping them to build a loyal base is the key to growth. If people don’t know about your product or brand, they won’t know to buy it when the need arises.
Here are some ideas for good and bad marketing strategies that you should employ or avoid:
- Leverage the internet — including a website and social media — to build your digital reach and engage with customers.
- Focus on creating valuable content that helps customers understand how your product solves their problem, and make sure they can find the content on search engines. For example, if you’re a plumber starting your own business, you can create how-to videos of simple plumbing fixes.
- Target the market, knowing the persona you want to reach and where they’re active.
- Unify the messaging strategy so that there’s consistency across different channels, regardless of whether the client finds you through a podcast or mobile apps.
- Carefully track campaigns using platforms like Google Analytics to understand how customers respond to your marketing, what works, and what doesn’t. (Don’t be intimidated: Google Analytics offers great tutorials for beginners, and they’re free!)
- As a small business, you likely have limited funds. Don’t try to build massive, money-draining campaigns that cover everything at once. You don’t need to invest in sophisticated API or artificial intelligence. Start small, such as with a website and social media page or two, to attract attention.
- You have inconsistent marketing. If you run a local AC business, only advertising over the summer will limit your customers. Advertising throughout the year to build brand recognition can lay the foundation for relationships, which the summer promotions and ads can then help bring in as people begin to switch on their AC.
- You neglect your website. Customers look at websites as an extension of the business. When the website is not well-maintained, it reflects poorly on the professionalism of the company. For example, consider someone building a copywriting business. A website with outdated samples or a slow-loading site will not be an eager hire for a company looking to build its marketing through content production.
Occasionally, something happens that results in the business getting sued. Encountering legal action can be devastating, emotionally and financially. Financially, it can be very expensive to defend yourself from a lawsuit, and if you haven’t taken steps to incorporate and protect or insure yourself, your assets could be at risk.
One of the first steps you should take when forming a business is making sure your paperwork is organized and prepared. Consider registering your DBA name or trademark and then determine how you want to organize your business. You have a range of options, from a limited liability company (LLC) to a corporation. At ZenBusiness, we can help businesses file their paperwork to ensure they stay compliant with the state and get set up the right way.
Not Understanding the Target Market
Without a market analysis, a company might misunderstand their target market. If you haven’t done a formal analysis of your target market and created a business plan, you run the risk of mistargeting your audience, potentially missing out on sales, annoying customers, and losing business profits.
If you don’t understand your target market, you may see signs such as:
- You struggle to get repeat customers. If you have an abnormally high rate of customer churn, that indicates that your customers don’t align well with your business products and services.
- You see a high rate of leads entering your sales funnel, but very few convert. This may mean that your customers lack purchasing authority or have interest but no direct need for your product.
- Your email lists and other mid-funnel targets don’t perform well. If people register to receive emails or look at other gated items but quickly unsubscribe from your brand, it’s clear they’re not your target audience.
To best understand your target audience, take the time to research your market thoroughly, how customers respond to your product, understand the competition, and test your ads to make sure you hit the right audience segment. Learn more about uncovering your market here.
Burning Out and Losing Focus
The passion you feel for your business idea causes you to be enthusiastic; it drives you to go through the initial planning stages to launch your business. However, sometimes, founders can take on too much too soon.
They throw so much of their time and energy at their business, without taking any time to recover and take care of themselves, that they burn out. No matter how amazing your idea is or how passionate you feel about it, you’re not immune to burnout. The WHO even recently listed it as an official medical diagnosis, and it can impact everyone, from freelancers to founders of big tech companies.
- Remember the importance of breaks from work, both for you and your employees. This means keeping your “off” hours “off” as much as possible. It also means taking time to relax at work, such as taking 15 minutes to sing happy birthday to an employee with some cake.
- Delegate whenever possible. Remember that you hired your employees because you trust them to help achieve your vision. Therefore, trust them to do their jobs well. Delegate tasks when they fall into the employee’s job description and save energy for what you have to do.
- Understand how to prioritize tasks. Not everything can be done at once. For example, if you run a freelance writing business, noting deadlines on a calendar, prioritizing the most pressing dates, scheduling work so that you know you can hit your goals, and progressing at a steady pace can help maintain your sanity.
Consider these ideas to avoid burnout, and remember that taking time for yourself can protect your business in the long run.
More Resources for Small Business Owners
Various tools and suggestions can help as you work to build your business. Search “startups” or “startup failures” to find information that will help you on your entrepreneurial journey and remember that even those in Silicon Valley seek help and guidance.
Meanwhile, ZenBusiness can help take some of the paperwork off your shoulders, whether you need an employer ID number or want to ensure you remain in compliance with your state’s laws.
FAQs About Why Startups Fail
How many startups succeed?
The rate of success can be measured by looking at how long businesses last. About 8 in 10 businesses still run after one year, but another 10% close their doors by the end of the second year. By five years, about half of businesses survive. By the 10-year mark, 30% of businesses still run.
What’s the best type of business to start?
The best industry to begin a small business is the one where you have the expertise, vision, and creativity needed to drive innovation and create an offering that people need.
The SBA reports little difference in business failure rates across all industries, which means that there are no industries where success is a “sure thing.” It comes down to your ability to know your market and create a product that keeps people coming back for more.
What is a unicorn business?
A unicorn business is a successful startup that nailed the product/market fit and managed to climb to a $1 billion valuation as a private company. Very few manage to accomplish this feat in the United States, making it a “unicorn.” Notable unicorn companies include Airbnb, Instacart, and Spotify.
Who can save a failing business?
With high-quality products and market research, some dedicated entrepreneurs can save their businesses from startup failure. The key lies in understanding where problems have occurred and what you can do to get your business back on track.
How do you ask for help when a business is failing?
If your business has begun to fail, you’ll want to ask for help from other professionals to provide expert guidance. Turn to your social network for guidance. You’ll need to increase transparency with them, speaking about what is causing the problem, and be willing to get their feedback. You can also turn to the experts at ZenBusiness who understand that outside help and guidance can save a business.