12 Surprising Reasons Why Startups Fail

 

Even with a great product offering and a ready customer base, startup businesses can fail for a multitude of reasons. Postmortems have revealed multiple explanations for this, which can be classified into two categories: Economic reasons and Personal reasons.

Here are 12 surprising reasons why startups fail at the embryonic stage.

Economic Reasons

1. Lack of capital is one of the primary reasons for startup failure in its nascent stage. A key function of management is to know at all times how much cash is available and if it is sufficient to carry the business to the next milestone, which will enable successful financing or a positive cash flow. Often, the importance of this function is overlooked, ending in inevitable failure. What frequently goes wrong is that management fails to keep tabs on cash flow until the cash reserves become insufficient to fund the enterprise to the next milestone. Sometimes, it might still be possible to raise cash, but the valuation will be significantly compromised.

2. Bad credit score, reflecting an inability to pay your past credit obligations on time not just once but repeatedly. Investors will be afraid to lend you any money due to a bad credit score in the past. Factoring is one of the solutions if you have a low credit score.

3. Expanding too soon or premature scaling is detrimental to a startup because it inevitably results in excessive expenditure. The causes could be multiple and some of the more common ones could be

  • Premature overhiring of employees;
  • Excessive expenditure on customer acquisition before a product is ready; and
  • A sudden jump in market spending in the absence of core metrics analysis.

4. Poor management often supersedes lack of capital for startup failure. A study reveals that while 89% of big firm leaders were exposed to management training, only 40% of startup owners enjoyed the same exposure. This percentage dropped significantly in startups employing 24 or less people.

5. Business model failure or lack of proper understanding of the business model is yet another cause of startup failure. The simplest way to focus on significance of the business model is to analyze the following two questions:

  • Can a scalable way to acquire customers be found?
  • Can these customers be monetized at a significantly higher level than the cost of acquisition?

6. Market problems merit mention, since many startups fail because they are oblivious to a market problem and hence become unable to react to the situations appropriately. It is believed that 42% of startups fail because they concentrate on creating a solution to a non-existent problem rather than filling a market need. Avoiding failure necessitates a proper understanding of the potential market and what the customers’ needs really are.

7. Product problems are yet another key challenge that cause startups to fail because when a product fails to meet the market need, the business is bound to suffer. What it boils down to is a failure to realize the right product/market fit.

Personal Reasons

1. Many startup failures stem from the arrogance of their founders who tend to be over-confident about their ability to lead and their vision. This sort of hubris and egotism lulls the management into a complacent sense of invincibility, often resulting in hasty and ill-considered strategies and decisions.

2. Short-sightedness is another detrimental trait which arises out of an excessive focus on money. Money can be acquired in the short term at the cost of loss of focus. The solution is to focus on keeping customers happy through problem solving rather than staying solely focused on money as a fuel that drives the startup vehicle.

3. Many startups have failed because of sloppiness leading to a poor product, and potential legal challenges. The solution is to become more detail-oriented or partner with someone who is.

4. Imbalance generates stress, which in turn leads to poor decisions and early burnout. Imbalance is the fallout of a poor work-life balance, which many startup founders fall prey to and continue to stay shackled to, despite an abundance of data about its harmful effects. To work around imbalance, its pitfalls need to be recognized and a conscious decision should be made to slow down.

5. Inflexibility is a human instinct, which arises from a stubbornness to pursue a path known to fail. Inflexibility is unjustified in a startup because nimbleness and the ability to change rapidly should be inherent to the structure of any early-stage business. To overcome inflexibility, one must accept the need to change direction rapidly when required, and accept change rather than resist it.

Most of the above failures stem from lack of knowledge, lack of preparation, and the inability to market a product or service that addresses the needs of customers. So, steer clear of these pitfalls to take your startup to the next level successfully.

Ethan Benjamin is a representative of 48 Factoring Inc, and writes articles related to current financial trends. Follow him on twitter at @ethanbenjamin80.

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