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main reasons why startups fail by Vestbee
05 January 2022·5 min read

Matt Roberts

Co-founder, ZOKRI

Main Reasons Why Startups Fail And Advice On How To Avoid Them

Turning a startup into a viable long-term business is not easy. However, it’s also not impossible, so don’t let the statistics discourage you from the widely repeated allegations that 90% of new businesses fail within the first year. The statistics show that it is not as black as it is painted certainly not in the USA. Since the mid-nineties, the Bureau of Labour has been tracking how many start-ups are still trading years later. Their statistics show that around 80% make it through the first year. About 65% are still trading after 2 years and around 52% after 5 years. Nevertheless, those are sobering figures, which highlight the importance of being aware of the reasons for startup failures and discovering a way of avoiding them. Below, we outline the main issues and share strategies any startup can in order to survive and perform effectively.

To write this part of the article we have used the data provided by CB Insights. They studied 100 startups' failure post-mortems, and these are the main issues indicated by the owners that led them to back out.

Selling something that nobody wants 

Around 42% of startup owners eventually realized that there was no demand for the product or service they were offering or that other companies were already meeting that need at a price point that a new business will struggle to compete with. 

How not to go wrong? Just take a breath, sit down, and calmly work out if what you have to offer is what your potential customers seek. Before making any further moves and investing more in product development, make sure that people are ready for the innovation that you are trying to bring to the market.

Cash Flow issues

Sadly, every year, tens of thousands of firms go bankrupt as they simply run out of money. In some cases, it happens even if the business model is viable so there is a demand for the product or service. It enables startup founders to make a profit out of the transaction, however, a lack of cash flow means that it is impossible to continue running the business. For example, a company could land a new manufacturing contract, but don’t have enough cash to be able to buy the materials to fulfill that order.

Poor startup management and losing focus on objectives

Many business owners do not have a business plan. In the UK, 23% of owners have never written one.

Even those that do have one, this is where their business journey ends as they often fail to take the next step - setting clear goals to achieve the business objectives, something that leads to drift. Without clear and measurable goals people cannot work efficiently and tend to stagnate due to a lack of proper motivation and transparent benchmarks. 

The path to achieving each business goal needs to be clearly identified with the smaller objectives set for each step - they have to be measurable, so that progress can be effectively monitored. There are several methods business owners could use, however, we strongly recommend the Objective Key Results (OKR) approach, which enables you to grow the business successfully and take advantage of upcoming opportunities. 

Difficulty in recruiting the right people

Increasingly, businesses in many countries, are struggling with recruiting people with the skills suitable for the position. This is a particular challenge for startups,  according to the Start-up Outlook survey carried out in 2019  63% of startups had struggled to hire the right people. As a result, many of them had made the mistake of simply hiring the first person that walked through the door.

It is hard to deal with this issue, however, offering a good remuneration package makes it more likely for the right candidate to accept a job offer. Moreover, remember to be clear about what your objectives are, and share publicly your so-far business achievements, it is also important to emphasize the advantages of working in your fast-growing business. Many people will welcome the chance to work across many disciplines and bring their knowledge and fresh perspective, especially if you are willing to invest in their development by offering staff training and handing over the bigger responsibility. 

Fortunately, it is proved that small business owners are failing less. Given the fact that the rate of business failure has fallen by 30% since 1977 (see here), it is clear that modern business owners are learning from the mistakes their predecessors made. Many are using new tools and technology in a way that greatly increases their chances of long-term success. So don’t be bothered that much with statistics and numbers, just try to learn from mistakes other entrepreneurs have already made and implement the right practices in order to grow and establish a strong position on the market. 

Related Posts:

What Is A Broken Cap Table And How Startup Can Fix It? (by Ales Duchac, Credo Ventures)

The Biggest Mistakes Startup Make In Getting To A Product-Market Fit (by Lyubov Guk, Partner, Blue Lake Accelerator)

Startup Fundraising: Due Diligence (by Ewa Chronowska, Partner, Next Road Ventures)

 

Analysis#Startups#Tips


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