Financing Failures: Why So Many Startups Can’t Survive

A Startup. from Shutterstock

Around 20% of all new firms founded in the United States fail within the first year. Worse, after four years, almost half of them will fail.

Lack of a market, bad employees, and a problem we can all relate to – not having enough money — are the leading causes of a business closure. Pandemics around the world are also much higher on the list than they were in 2019.

You can’t ensure that your company will survive, but understanding the dangers can go a long way toward keeping it secure. Here’s all you need to know about startups that fail.

Why Do Startups Fail?

A wide number of reasons can lead to a company’s failure, and not all of them are within the company’s control. But what can a new business owner do to avoid joining the half of businesses that fail within the first four years and join the other half?

We’ll look at their definitive rating of the top causes why a firm fails, with case studies and other data thrown in as necessary. Don’t worry, we’ll tell you what your company can do to avoid the most common hazards.

The following are the top six reasons why startups fail:

There Is No Market

A startup may provide a cool solution to a problem, but if the problem does not affect a large enough number of potential customers, the company will not be able to survive.

The moral of the story is to create something that people want but can’t acquire. Your handcrafted reusable grocery bags may be attractive, but if your consumers already have a burlap sack that would suffice, you will not sell them. Your firm will not develop or retain clients if your existing product or service does not solve a genuine problem.

Even if commercial success is on the horizon, it may be too far off. That’s why Alphabet’s “Loon,” which promised to offer global internet access via balloons, was one of the biggest startup disappointments in recent memory. Despite total financing of $125 million, Loon was shut down in January 2021.

Exiting the Runway

Getting a business off the ground is a long and arduous process that takes years. Even if everything is rolling along well, a company can run out of cash before it reaches profitability. 

According to U.S. Bank data, 82 per cent of failing small businesses failed to owe to either “poor cash flow management abilities” or “poor knowledge of cash flow.” Granted, there’s a considerable difference in the research, but both agree that dwindling cash flow is one of the leading causes of business failure.

The bottom line: Plan ahead and tighten your belt when you can. Sort everything into categories and compare your spending to that of other businesses in your industry.

Hiring Issues

A company is only as good as the people that work for it. Startups can deviate from their original strategy, but they cannot deviate from their core staff. Because of its tiny size, employing the proper people is very important for a startup. If two founders have run the company from start to finish, their new recruit accounts for a third of the total workforce.

Going with emotional or “gut” instincts rather than a checklist, a bias toward technical proficiency over the community and team chemistry, and failures to identify embellishments or lies from candidates are all common reasons for poor hiring processes.

The takeaway: Hire a quality hiring firm, or at the very least devote a significant amount of time to figuring out your company’s hiring process. Above all, don’t employ just on the basis of “cultural fit,” as this will lead to new hires with the same blind spots as your current team. You want someone who can bring new experience and skills to the table.

Competitors Who Are Better

Your company may be successful, but if your competitors get an advantage, you will lose out. 

Other contributing factors are comparable, such as the 13% whose product was mistimed or the 13% who lost focus. Competitors gained momentum in both cases as a result of mistakes made by businesses serving the same client base.

This tripwire is especially dangerous for venture-backed enterprises. Jawbone, a smart device firm, succumbed to this problem: the $3 billion startup sucked up $930 million in total capital over 17 years, but it still failed in July 2017, liquidating its assets. The company sold fitness trackers and wireless speakers, but it wasn’t able to gain a significant enough market share to meet share requirements.

The moral of the story: The moral of the story isn’t as apparent as you may think. The truth is that you have no control over how good your competitors are. You can simply work as hard as you can to improve in a variety of areas. Instead of trying to please everyone, time your products right for the market and stay focused.

A Weak Business Plan

It’s a good idea to keep your business plan flexible. Never having made a plan? It’s terrible.

Aside from strictly monetary lapses, business plans for startup lapses come in a variety of shapes and sizes. Failing to adapt to the market and failure to set up generous employee pay stubs are two common concerns. Another potential issue is the converse of poor hiring practices: some organizations fail to devise an exit strategy for removing shiftless co-founders.

The takeaway: Layout your company concept ahead of time, taking into consideration any potential stumbling blocks. And, as time goes on, keep updating it to reflect the most up-to-date information on your company’s performance. Keep in mind that the first few years can be difficult.

Marketing Mistakes

Another prevalent cause of company failure is a weak marketing strategy, which accounts for 14 per cent of all business failures.

Some startup CEO’s are great at producing products, but they struggle to sell them. Even still, no amount of coding or manufacturing expertise can replace the value of a competent focus group. You’ll need to know how to convert leads into consumers from a particular demographic.

The moral of the story: Don’t scrimp on your marketing budget. Every part of running a business is critical, and even the strongest product-market fit in the world won’t help you if you can’t get your target consumer in the door.

Conclusion: Running a Business Is Difficult

Startups fail for a variety of reasons, including business markets, capital flow, hiring, competition, strategy, and marketing. They’re difficult to get right, and there’s no way to avoid making mistakes with a fast checklist. But it’s precise because of this difficulty that entrepreneurs enjoy the game.

Finally, this post will not be able to salvage your company on its own. However, we can offer you an idea of which topics are the most important for you to be aware of. Finding a market fit is critical, as is maintaining a balanced budget, and recruiting the greatest staff will pay off handsomely.

Above all, the first four years are the most difficult. If you can go through them, you’ve already beaten half of your competitors, which means a lot.

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