Success usually comes with many challenges. Statistically, 90 percent of startups fail within their first few years. Understanding why startups fail is crucial for any budding entrepreneur. Instead of starting a new business, think about buying one. But, there are things no one tells you before buying a business. Let’s discuss the top 10 reasons startups fail and offer practical advice on how to avoid these common mistakes.
Statistics on Startup Failures
- In their first year, 10% of these businesses closed.
- Founders starting a business for the first time have an 18% chance of success.
- Starting a business usually costs around $3,000.
- The biggest expense for many businesses is their staff’s salaries.
- When small businesses fail, 34% of the time it’s because they don’t offer products that fit well in the market.
- About 22% fail due to weak marketing strategies.
- Each year, a typical venture capital firm looks at over 1,000 business ideas.
- If a startup gets money from such a firm, there’s still a 30% chance it will fail.
- Nearly 75% of fintech (financial technology) startups fail within 20 years. In the U.S., tech startups are most likely to fail.
1. Quitting Their Day Job Too Soon
A common mistake many entrepreneurs make is quitting their day job too early in their startup journey. The allure of full-time entrepreneurship is strong, but prematurely leaving a stable source of income can lead to financial strain. It’s essential to assess your startup’s financial health and growth trajectory before making the leap. The key is to find a balance — maintaining financial security while dedicating enough time and energy to your startup.
Keep your salary until you have one of these 3 things:
- Cash to cover the downside
- Investors who can help you
- Deep understanding of the business or the industry
2. Starting Partnerships Immediately
In the rush to grow and scale, entrepreneurs often enter into partnerships without proper checking. While the right partnership can be a boon, a hastily formed one can lead to conflicts and misaligned goals. Conduct thorough due diligence, understand your potential partner’s business practices, and ensure alignment of values and visions for the business.
Define your non-negotiables
- No partners get equity without cash in
- No 50/50 partnerships. Someone needs to be in control and it should be you.
A partnership can be very powerful – or equally expensive.
3. Having No Exit Plan
Many entrepreneurs focus solely on starting and growing their business, neglecting the importance of an exit strategy. An exit plan is not just about selling your business; it’s a strategic tool that guides decision-making and business development. It helps in planning for scalability and making your venture attractive to investors.
Remember, a business you are passionate about now may not be one you want to own and operate in 10 years. So, it is important to have a Plan B.
4. Buying in Secret
Some entrepreneurs engage in covert operations, like secretive acquisitions or hidden business tactics, often to avoid competition or criticism. However, this approach can backfire, leading to trust issues with stakeholders and potential legal complications. Transparency is key in business dealings, fostering trust and credibility.
Tip: Join a group or community to review your deals
5. Rushing the Process
The desire to see quick results can lead entrepreneurs to rush decisions and business processes. This impatience can lead to poorly thought-out strategies, subpar products, or ineffective marketing campaigns. Success in startups often requires a steady, measured approach, allowing time for refinement and growth.
Plan on 3-6-12 framework
- 3+ months to learn deal-making (terms, financials, roles, tactics)
- 6+ months to identify, negotiate, and secure a deal
- 12+ months post-purchase to learn the ins and outs of the business
6. Not Bringing in Experts
In an attempt to save costs or maintain control, some startup founders refrain from seeking expert advice. This can be a critical error, as experts bring in-depth knowledge, experience, and a fresh perspective. Whether it’s legal, financial, or industry-specific advice, experts can help navigate complex business landscapes and avoid costly mistakes.
7. Not Buying Cash Flow
Cash flow is the lifeblood of any business. Many startups fail due to poor cash flow management. It’s not just about profit; it’s about the timing of income and expenses. Effective cash flow management involves meticulous planning, monitoring, and adjusting your business operations based on your financial status.
8. Not Knowing Numbers
A startling number of entrepreneurs lack basic financial literacy, which is essential for making informed business decisions. Understanding your numbers — from cash flow to profit margins — is critical. It allows you to identify financial challenges early and make strategic decisions based on sound data.
Basics you need to know:
- How to read financial statements
- The impact and weight of loans/debt
- How much you can afford to lose
Always protect your business.
9. Falling in Love Too Easily
Entrepreneurs often become too emotionally attached to their business idea or strategy. This emotional investment can cloud judgment, making it difficult to pivot or make necessary changes. It’s important to stay objective and be willing to adapt based on market feedback and business performance.
10. Ignoring Seller Financing
Seller financing is an often-overlooked funding strategy for startups. It involves the seller extending credit to the buyer, which can be advantageous for startups struggling to secure traditional financing. This approach can offer more flexible terms and lower barriers to entry, but it requires careful negotiation and understanding of the financial implications.
Most new startups, about 90%, don’t succeed. In their first year, 10% of these businesses close. Founders starting a business for the first time have an 18% chance of success. Starting a business usually costs around $3,000. The biggest expense for many businesses is their staff’s salaries. When small businesses fail, 34% of the time it’s because they don’t offer products that fit well in the market. About 22% fail due to weak marketing strategies. Each year, a typical venture capital firm looks at over 1,000 business ideas. If a startup gets money from such a firm, there’s still a 30% chance it will fail. Nearly 75% of fintech (financial technology) startups fail within 20 years. In the U.S., tech startups are most likely to fail.
How Much Does It Cost a New Business Owner to Start Their Own Business?
Starting a new business usually involves different costs, which can vary a lot. On average, it might cost around $3,000 to launch a small business. The average startup costs of home-based businesses and franchises fall between $2,000 and $5,000. Some of the main expenses include renting a space, buying equipment, and paying for any licenses or permits needed. Marketing to attract customers can also cost money. However, some businesses, especially those online, can start with less money.
Being aware of these common pitfalls and actively working to avoid them can significantly increase your startup’s chances of success. Remember, entrepreneurship is a journey of continuous learning and adaptation. Stay informed, stay flexible, and most importantly, be prepared to face challenges head-on. With the right approach and mindset, your startup can not only survive but thrive in today’s competitive business landscape.