Why so many startups fail

  • by

It’s no secret: A lot of small businesses fail. In fact, most small businesses fail. This article explores some of the key reasons why startups fail, with tips to help you avoid some common pitfalls in your own business. 

Pitfall 1: Lack of market demand

A key reason why startups can fail is that the market for a company’s products fails to materialize. It is easy as a passionate founder to assume that if you have a specific need that there’ll be lots of other people in the world, that also have that need. While it is important to be passionate about the opportunity that you are pursuing, it is equally important to be realistic about the market demand: if you are the only person that would ever by your product, or potential customers have existing offerings that equally well serve them, the likelihood that you will be successful is slim. 

Top Tip: It is important to take steps to verify that the market that you are envisioning actually exists. Speak with potential customers, see if the problem that you are working on is one that is a significant issue for them, and explore what other alternatives there are. It is a lot better to verify early if the market you are exploring is only limited, than to devote significant time, energy, and resources on your business before determining that the market size is substantially smaller than you envisioned.

Pitfall 2: Difficulty gaining needed resources

Oftentimes, you may have a specific skill set. For example, a science background or a deep understanding of a particular engineering area. However, if you are not able to get the others on board and convinced of this to work with your firm, then you may have real challenges in pulling off your innovation.

Top Tip: Be realistic of the resources that you will be needed and explore ways of either obtaining them (or alternatives) early in the planning of your business. Actually having a game-plan, where you have thought through how you will acquire necessary resources is important: it is easy to fall into the trap of assuming that everything will fall into place, but in many cases, you need to actively take steps to think through how to gain access to needed resources.

Pitfall 3: Difficulties in pulling it off

Another difficulty that businesses have is actually pulling it off. Sometimes, actually getting many different parts to work well together can be such a challenge that you have a hard time actually achieving the goal that you set out to achieve. A technology that you are developing takes a lot longer to perfect than you were expecting or your inexperience in your market may cause early-missteps. Not everything will go as expected and new challenges will arise.

Top Tip: It is important to recognize that while planning is important, it is also important to be being willing to pivot and try new approaches as needed. Indeed, advance thought may actually help you adapt down the road: the more you have through through your approach and considered potential difficulties in advance, the better placed you likely will be to work through issues as they arise.

A key thing to recognize is that there will inevitably be times where not everything goes to plan. If you have already thought through possible ways that you can adapt and adjust, the easier you will find it to pivot to a new solution and avoid possible pitfall impacting the whole organization.

Pitfall 4: Entrance of new firms

Another difficulty is other firms entering the market. Even if you are able to pull off your product or service. If other firms are able to seize upon your success and enter into an expanding market, then that can be a key problem for your business. You may find that these other new entrants into the markets are better set up better resources and superior abilities than you would ever have. And they are able to really start to dominate your business section. 

Imagine if you were a startup with a technology service, and one of the big tech companies decided that they wanted to enter that market. They would likely have a much larger customer base, much more financial resources, potentially complementary products, such that it is possible that quite quickly they would be able to come up with a superior offering that you would have a hard time ever been able to compete with.

Their success will trigger, much larger firms entering the market that they’re not really able to successfully complete with.

Top Tip: It need not be that you are forced out by a vastly superior company. But if there are very limited barriers to prevent the entry of new firms or mobility barriers to stop existing firms from moving into your area, it is quite likely that you will face imitation and the level of competition will ratchet up. This may result in greater competition between the features and price offerings, especially if the overall market size is stagnant or declining,

Pitfall 5: Lack of managerial experience

A final difficulty that can impact startups is a lack of managerial experience – or an unwillingness to make tough decisions as the firm grows. Often times founders come with a specific and important skill set that has led them to pursue the market opportunity. For example, a science background or real deep understanding in a particular engineering area. However, if you are not able to get the others on board and convinced of this to work with your firm, then you may have real challenges in pulling off your innovation.

While passionate, and potentially uncompromising, founders may important to successfully launching a firm, a lack of direct experience managing employees or prioritizing tradeoffs can start to compromise the success as the company starts to grow. It is not unusual to see investors look to replace founders of startups with managers who have experience growing a company to better place the firm for continued growth. 

Top Tip: It is important to recognize gaps in your experience, and to upskill yourself or bring in other talent to help compensate for these gaps. You can be the best scientist, engineer or artist in the world, and be able to recognize new opportunities that other can not, however this may not be enough to best place you to handle the day-to-day management activities of companies.

Summary

Starting a new business is never easy – there are lot potential problems. Being aware of the potential pitfalls, and taking steps to plan for them, can help offset problems. 

Related Articles

The importance of a business plan: Why all startups should develop one

It is easy to discount the importance of a business plan. As a startup founder, you likely have lots of pressing activities, and since there are likely many uncertainties about your business, it is possible to fall into the trap of continually delaying documenting your firm and its approach.

4 Risks of pursuing a blue ocean strategy

The blue ocean strategy approach of identifying or creating a new market space free of competitors sounds attractive, it also has a lot of risks associated with it. This article examines four of the main risks associated with a blue ocean strategy.