The 15 Most Common Reasons Small Businesses and Startups Fail
Did you know that over 50% of startup businesses fail in the first four years?
It’s a sobering statistic. But, there are also many success stories. About 30% of businesses make it to the 15-year mark.
How can you ensure that your business survives and grows?
To help you avoid failure and achieve success with your business, we look at why small businesses and startups fail and ways you can avoid the same fate.
15 Reasons Why Businesses Fail:
Let’s take a closer look at why small businesses and startups fail.
1. No market need
The best startup businesses are designed to solve a specific problem.
If you can’t find a significant problem to solve, then your startup is already in trouble.
Pay attention to your customers’ needs since 14% of businesses fail due to not addressing customers’ needs.
Invest the time to conduct market research and test your business ideas with actual customers before deciding on an idea you’ll pursue.
2. Not having a viable go-to-market strategy
Many startup businesses fail because they lack a go-to-market strategy.
Most startups focus solely on one aspect of the business, and marketing and sales usually become an afterthought.
Sometimes, founders don’t see the point idea of spending on a go-to-market strategy.
This is a mistake. Your go-to-market strategy is one of the essential parts of your business. If you don’t know how to market your product, it won’t matter how great it is if no one knows about it.
That’s why sophisticated investors look for detailed marketing strategies and tactics in your business plan. They know that you’ll struggle to get people’s attention without a go-to-market strategy.
Your go-to-market strategy should include:
- A description of the target audience, including demographics and psychographics (e.g., what they like)
- How to reach this audience (social media strategies, advertising)
- The key messages you’ll use in marketing materials and ads
- How you’ll measure success
3. Poor product
Sometimes, failure can come down to the product — and a poorly-made one was enough to sink companies 8% of the time.
Do you know what’s better than a great product? A good enough one.
Your startup will fail if you don’t have something people want to buy or use often enough. When you ignore what users want and need, consciously or accidentally, you guarantee that your products will fail.
At this stage, it’s not about whether your product is perfect; it’s about whether it’s good enough for customers.
So how do you know when that time has come? There are three key questions:
- Is my product solving a real pain point?
- Do my users love my app or service?
- Will my target market pay me for what I’m selling them now (or at least give me feedback so I can improve)?
4. Bad business model
A business model is how a company operates and makes money. It forms the backbone of any business and must be strong and sustainable for the company to succeed.
An ideal business model can generate enough revenue to cover costs and ultimately turn a profit that can sustain the business in the long run.
That said, there isn’t a singular template for business models. As a general rule of thumb, it should suit your company, product, and target audience. It also needs to be scalable to grow as your customer base expands.
As a startup founder, this means having a clear understanding of your target market, your customers, and your industry. You also need to understand the costs associated with your business model and plan how you will generate revenue.
5. Pricing and cost issues
Pricing is one of the more challenging aspects of running a business. It is difficult to find the sweet spot between pricing a product high enough to cover costs but low enough to attract customers.
You need to understand the customer persona and purchasing power to set the right price for your product.
If you price your product too high, you’ll miss out on potential customers; if you price it too low, you won’t make enough profit to sustain your business.
Additionally, founders also need to understand the cost of their product.
Some products are easy to make but expensive in terms of materials or labor costs.
Other products could be inexpensive but may require significant time spent on making them. This can still result in a rise in cost because time is money.
For example, please look at our guide to start a clothing business, how to start a consulting business, and how to start a photography business, where we examine in detail how to price your products and services for those industries.
6. Not the right team
The first step to avoiding these pitfalls is ensuring you have the right team.
When assembling your team, ensure each member has the necessary skill set and experience to execute their role.
Your team should also be built with a balance of personality types that will foster creativity and innovation and work together efficiently and effectively.
Having a solid foundation of talent before seeking financing can also help attract investors who want to see real potential in your company’s future success.
7. Being unprepared for changes in the market
Many startups fail because they are unprepared for changes in the market. They might have a great product or service, but the same products can quickly become obsolete if the market changes.
This is why it’s crucial for startups always to be adaptable and ready to change their plans if necessary.
For example, imagine you have created a new app that is very popular with users. But then, a new operating system adopts much of the functionality found in your app.
Suddenly, you face the prospect of losing all of your users, and you’re suddenly back to square one.
Or, imagine that a new company comes out with a similar product that is cheaper and better than yours. If you don’t have a plan to improve your product or lower your prices, you will lose customers quickly.
Changes in the market can be challenging to predict, but it is crucial to be prepared for them. You can’t afford to be stagnant in the volatile world of e-commerce and tech.
If you are closely attuned to updates in your industry and are ready with a plan for what you will do if the market changes, you are more likely to ride out the market shifts.
8. Failure to learn from mistakes/make adjustments
Most startups don’t have a straight line to success but have many ups and downs. There are going to be mistakes, miscalculations, and failures.
Persistence is vital for startups, but if adjustments to a better way of doing things don’t also occur, a startup may persist right out of business.
Persistence only works if the business model is sound and the right decisions are made along the way.
9. Inability to raise capital
More than 80% of founders self-fund their business.
Only 0.05% of startups raise venture capital.
Consider whether you’ll need outside funding. You can find business investors or find other ways to finance your small business.
But be prepared for rejection. If you have never raised capital for a startup, you will be surprised by how often investors reject your ideas.
As a founder, you should be prepared to constantly network and find new investors. It helps when you can also present your ideas under the best winning conditions and with a winning pitch deck that helps you secure funding.
10. Bad timing
If you release your product too early, before it’s ready, people might think your product isn’t good enough.
This is critical because once you lose your customers to a negative first impression, getting them back can be an uphill battle.
Take, for example, Vreal, a VR platform. The company intended to build a virtual reality space for video game streamers to hang out with their viewers and raised almost $12M in its Series A in 2018.
However, the available hardware and bandwidth capabilities at that time didn’t evolve as fast as the company had expected. And although Vreal delivered on its promise, it struggled to attract any significant usage from its target market.
If you release your product too late, you may have missed your window of opportunity in the market.
Too many business owners wait to launch their business and then find that several competitors have entered the market ahead of them.
11. Ignoring cash burn
Money is the lifeblood of any business, especially startups. It is the key resource that is needed to keep the business running and to help it grow.
Twenty-nine percent of startups fail because they run out of money.
Many startup founders focus on one area of the business (i.e., product development) and ignore the rate at which they burn through cash.
They can likewise find themselves in the pitfalls of overspending by scaling too fast, too soon, and then assuming that investors will gladly sign checks to replenish the company’s coffers.
But you don’t need to be a miser to be successful. While managing your burn rate is essential, it shouldn’t hinder your business growth.
The best entrepreneurs spend only on essentials.
Strategic spending on marketing campaigns and other initiatives designed to gain market share and attract new customers differs from the daily operational expenses incurred, for example.
To avoid being caught on your back foot financially, always know how much cash runway you have left.
It would help if you likewise got serious about the two main variables that will determine your burn rate:
- Unit economics – refers to the amount your company earns on every item your company sells. You can find this value by subtracting the new customer acquisition cost from the lifetime value of that customer.
- Cost of growth – refers to the most significant expense. For most startups, it will be employees (salaries and benefits).
Once startup teams identify their unit economics and cost of growth, they can make informed decisions on how much needs to be raised to cover the burn rate long enough to achieve your goals. The rule of thumb here is that companies should raise enough money for 12-to-18 months.
12. Lack of core skills
It is helpful (but not necessary) for someone looking to start a food business to have competency and experience in restaurant management. Entrepreneurs boost their odds of success if they pick industries that value the skills they excel in and love to practice.
That said, as amazing as founders are, they can’t do everything. A business is multifaceted and will require specializations for it to run smoothly.
Delegation is crucial for your small business.
As a founder, your skills need to be complemented by specialists. More importantly, as a founder, you must be mindful of what you don’t know (more than what you know).
If you and your co-founders find that you lack the skills or abilities to get your company going, identify those needs early on. As your startup grows, you can start assembling a team of specialists based on your need.
13. Overlooking the competition
Forget what you’ve heard about ignoring the competition.
Every successful business owner studies and understands their competitors.
Around 20% of startups fail because their competitors overtook them. This can happen even after you’ve been in business for three to five years.
Competition can arise anywhere and at any time.
It might be through a new entrant who comes with a better product or service, an established player that enters your market, or another startup that can execute better than you.
If you’re not prepared to deal with competitors, their presence can quickly lead to your business’ downfall.
14. Weak foundational partnership and communication issues
When people are not on the same page, it can be difficult for them to work effectively as a team.
That said, partners don’t need to be exactly alike. There’s an argument for founders to have opposing but complementary strengths and weaknesses.
However, business partners still need to be on the same page and have a shared vision for the company.
Keep your communication lines open, honest, and constant to ensure that you and your partners still have aligned interests and goals for your company.
It is also critical for everyone on the team to understand their roles within the business and what they need to do for everything to run smoothly.
And if someone isn’t doing their job correctly, the leaders need to address the issue immediately. This way, the issue won’t have to snowball out of control later.
15. Burnout and lack of passion
Most startup founders rarely follow a work-life balance. They’re primarily dynamos who are constantly on the go, so the risk of burning out is high.
Grit and perseverance are good qualities to have. However, a good startup founder should be able to assess a startup’s health without bias or too much emotional attachment.
A good startup founder should be able to cut losses where necessary and re-direct efforts when a dead-end is apparent.
And if it’s not burnout that gets you, losing steam could.
The urge to move on to something else has been a major factor in startup failure. This is usually attributed to many startup founders’ creative, shifting, and restless nature.
So, find ways to grow your business while reclaiming your personal life.
Think critically about these 15 reasons why most startup businesses fail and consider how you can avoid the same fate. It’s not easy to succeed as a startup founder, but it’s immensely rewarding when you do.