Startup Failure – What Causes It and How You Can Prevent It
November 4, 2019
Do what you love is a phrase we hear often. Self-help books are full of advice on why you should follow your passion and the best ways to go about doing it. The prevailing sentiment seems to be that as long as you’re genuinely passionate about something, the money will follow. But, is passion really enough to make your business thrive? Or is there more to it?
Truthfully, only 9% of businesses fail because of a lack of passion on the part of the owners. Clearly, a good work-ethic is not enough on its own to keep your startup afloat.
Why Do Startups Fail?
New businesses fail for all kinds of reasons. Some of the most common ones include:
- Lack of funding
- Insufficient market need
- Shortage of skilled personnel
Let’s take a look at some clever ways to get around these common pitfalls.
Lack of Funding
Most entrepreneurs are overly optimistic. We read about people who start businesses on a shoestring budget and turn them into a huge success. It’s inspiring. What’s not so inspiring however, are the stories about businesses that fail simply due to a lack of sufficient funding.
These stories don’t make headlines because no one wants to read about failures. While that is understandable, it is a pity because these entrepreneurs have just as much to teach us as their more-successful counterparts. They’ll tell you that bootstrapping it is not always the best idea.
Here’s what else you might learn:
- Your business is probably not going to turn a significant profit for the first six to twelve months. Ideally, you should have enough money to tide you over for the first year. Most of the money that you make should be put back into the business again.
- Debt can kill a new business. It might be easy to draw down on your credit card to get the money you need. Unfortunately, you’ll pay for this in terms of interest. Whenever possible, avoid debt. It’ll just be one more expense to add to the pile.
- Getting a business off the ground might be harder than you think, no matter how good your idea is.
Alternate Funding Options
Today’s entrepreneurs are often fortunate enough to have access to a far wider range of funding options compared to those who came before them. The following methods are all options for raising funds:
- Crowdfunding: Crowdfunding allows you to collect money from several different sources. It is customary to provide some kind of reward for those who donate over a certain amount. Many businesses offer a free product from the initial delivery or provide their services in exchange for funds.
- Angel investors: These are people who invest with the intention of getting a good return. They tend to be more cautious than venture capitalists but less strict than your standard financial institutions.
- Venture capitalists: Venture capitalists are more likely to take a chance on a new business. You’ll have to impress them, of course, but they tend to be open-minded even if success is a long-shot.
Insufficient Market Need
Let’s say you have a business idea you’re excited about. You are anxious to get things off the ground – which is perfectly understandable. You want to strike while the iron is hot, so to speak. You can’t believe that no one has come up with your brilliant idea before.
But wait, let’s take a step back. There are plenty of entrepreneurs who come up with excellent ideas that simply no one is interested in. It’s imperative to do real market research and answer some of the following questions:
- What products or services on the market meet the same needs as yours?
- Is your idea an improvement? Does it increase efficiency? Is it a more cost-effective solution to something already available?
- How will you convince customers to switch over to your option? How easy will it be for them to make the switch?
- How many people can you realistically expect to sell the product to? A product that costs $15 could make you a lot more money than one that costs $300 in the long run. How many people will be willing and able to pay the $300? You’d have to sell twenty of the $15 products to make $300, but the market for the lower price bracket is much bigger.
- Who’s your direct competition, and can you do better? Can you offer a better service, price, or convenience?
- Who is your indirect competition? What other things must your target market spend their money on?
- What are your goals? How can you measure your progress?
Answering these questions can help identify any potential problems before starting your business venture.
Lack of Skilled Personnel
Nothing kills a business quite as fast as not having the right personnel on your team. Running your own business is difficult, and a proper support structure is of the utmost importance. This is another downside of operating on a limited budget. To acquire skilled personnel, you’ll need to offer a decent salary. Try to find a good balance between ensuring your employees have the right skills and maintaining budget-consciousness.
Having a passion for what you’re doing is no guarantee of business success. It’s certainly helpful, but on its own, it won’t be enough. You can’t just launch your startup and hope you’ll get lucky.
If you’re willing to put in the effort up front, you’re more likely to achieve startup success.
It’s hard work, and there will be times when you miss the stability of a nine to five job and the security of knowing that you’ll be getting a salary every month. But there’s nothing quite like the excitement of seeing your own business idea come together and start to gain traction. If you can stomach the roller coaster ride of emotions and are willing to work hard, before you know it you’ll be on your way to becoming a future success story.
by Andriana Moskovska
Small Business Genius