Why Do Many Startups Fail?

For over four decades of starting and building businesses, and the last decade mentoring dozens of startup founders and CEOs, I have observed that there seems to be a set of reasons that startups struggle and fail. The US Department of Commerce has found that about 49% fail within the first 5 years. D&B found that 90% of all failures can be traced to poor management resulting from lack of knowledge…the inability to critically think about business financials, planning, human resources and marketing/sales. Startups don’t fail because there is no market need for their product, but because they are entering a market in which the supply and demand metrics are not in their favor. My personal observations as a successful entrepreneur and business mentor are that business owners go under & lose their businesses not because they weren’t talented or smart enough, but because they try to re-invent the wheel rather than rely on proven, tested methods that work. Founders need business knowledge in order to critically think about their business.

Many people talk about startup failure as if it’s the company’s problem. Startups themselves are risky but a startup is nothing more than a small room full of people, all working on an idea. If something goes wrong, it’s not the room’s fault. The four walls didn’t make a bad hire, or spend too much money, or failed to test the idea with potential customers. The people inside the walls did. This is why, when we talk about startup failure rates, we should be talking about people more than we talk about the business nature of an idea. Here are some thoughts about the people that cause businesses to fail:

Most startups that fail, fail because the founders tended to do some of the following:

  • They don’t want undertake the research necessary to “vet” their business concept idea;
  • They don’t run enough hypotheticals that assume the worst;
  • They don’t validate their idea by building a minimum viable product and then gather feedback from potential customers.
  • They don’t know what they don’t know (remember the D&B study) — in the sense that they make decisions about things they know nothing about, instead of seeking out a mentor or advisor with that realm of expertise;
  • They can’t manage their own emotional turmoil (an inevitable part of building a startup) and take their feelings out on people around them (usually team members);
  • They see raising money as the solution to their problems;
  • They would rather talk and try to prove how much they know, rather than listen and learn;
  • Most of all, startup founders get stuck on their original idea and refuse to pivot or refine their idea.

Let me stress that last point again, over and over entrepreneurs want me to validate their business concept ideas they have, rather than undertake the research necessary to refine their business concept. This isn’t an isolated problem. As I stated above, startups fail because the founders get stuck on their original idea…they want to do everything in their power to prove it can work. Many founders would rather try to make the original broken idea work, then admit they didn’t have it all figured out and keep pivoting in a better direction. Founders fail themselves, long before they fail their startup. And yet, it’s “startups” that are seen as risky.

OK, plenty of smart people have found dumb ways to start their businesses. Remember Traf-O-Data? Bill Gates and Paul Allen do. Before the duo started Microsoft, they aspired to build a product to help traffic engineers — only to close shop shortly after the first product demo failed to function. Failure is part of life in the entrepreneurial world, but too many founders let avoidable mistakes cost them their companies. Some studies have found that 42 percent of failed startups closed shop because they couldnʼt find a market for their products. In other words, they had a solution to a problem that did not exist. Always remember, customers don’t buy products or services, they buy outcomes and aspirations so look to the buyer’s problem first. To avoid joining the ranks of founders who wish they could do it all over again, steer clear of these common mistakes:

  • Mistake 1: Committing to a solution over a problem. This is the reason so many startups canʼt find a product-market fit. Founders, who come up with a clever idea, start looking for any excuse to turn that idea into a company rarely last long. You should start first with the problem and then work out the solution — not the other way around. Be sure to vet your business concept idea before introduction.
  • Mistake 2: Neglecting to test the concept. Test business ideas with real potential customers. For instance, it is far less expensive to validate your business idea by building a minimum viable product and then gather feedback from potential customers before you develop a business plan.
  • Mistake 3: Hire friends instead of experts. Many people who get along well in regular life should never go into business together. This isnʼt to say that friends can’t work together…only that friends who want to collaborate should consider how their personalities and skill sets support each other before committing. 
  • Mistake 4: Giving up easily. Failure is part of the learning process that can build to success. Great founders donʼt look for excuses to abandon ship. Think Thomas Edison. If the product/service fits the market, someone offering that it will eventually succeed.
  • Mistake 5: Ignoring advice from investors. Founders and investors donʼt always see eye to eye, but founders who consistently ignore their investors tend to lose more in sustainability than they gain in independence. Investors can offer a wealth of resources from such things as expanded networks to uncommon resources. Always seek value added investors and seek their input. I found this to be very helpful in building my startups.
  • Mistake 6: Taking cash flow for granted. The business might be ahead of its sales targets and under budget, but if the timelines on credits and debits donʼt add up, founders quickly find themselves scrambling to make ends meet. Keep cash in the bank to handle unforeseen events and provide a lifeline for times when invoices are late. Startups depend on their dedicated teams, but not many teams are willing to work without pay. 
  • Mistake 7: Assuming growth just happens. Startups, like teenagers, grow in spurts. One day, everything is normal; the next day, the business needs to double its staff to keep up with demand. These growth spikes are great for prepared companies, but businesses that assume growth will continue often find themselves spending money on unnecessary overhead. Be sure to open to analyzing projections using “worst case” scenarios.
  • Mistake 8: Waiting to hire until the last minute. Technical founders need sales teams and marketers to find customers. Founders need technical allies to create solutions worth selling. To avoid sudden disasters, hire or consult specialists in development, sales, marketing, legal and accounting as soon as possible. Most small businesses donʼt need full-time lawyers or accountants on staff, but founders should line up key advisors: CPA; Attorney; Insurance Agent.

Again, the biggest factor that leads to business failure is the inability of the founder to critically think about the business.  This is due to the lack of domain specific business knowledge. CRITICAL THINKING ISN’T AN ABSTRACT, TRANSFERABLE SKILL…Itʼs “DOMAIN SPECIFIC”. Itʼs intimately tied to knowledge of the subject…first you must possess information to think about it and the way you think about information in one field (business) is almost entirely different from how you think about it in another field (chemistry). So to increase your odds of success, be sure you have the business knowledge in areas like: planning; accounting; marketing; human resources. Many business failure founders could have led successful companies, but they let simple mistakes cut them down. The only way to avoid following in their footsteps is to learn from the past and obtain knowledge about business and your concept idea industry.

For more thoughts on starting your business, view the free video entitled Roadmap For Starting Your Business.

Copyright ©John Trenary 2022

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