Why Do 90% of Startups Eventually Fail?
Evan Crosby
Freelance Finance Writer and Founder of the "Zero to Crypto" Newsletter on Substack ??
Would you take an investment if there was a 90% chance that you were going to lose your money? While those odds might not sound great to you, each year thousands of highly motivated aspiring entrepreneurs gamble their life savings and livelihood to open their own business.
However, the failure rate of startups is around 90%, according to the Small Business Administration. With such long odds, it's a wonder that anyone is willing to take the risk of starting a business.??
Why do so many startups fail? The answer is complicated. For example, some people find out that they really aren't cut out to be business owners. Others pick a niche that's too competitive or fail to connect with their target market.?
The truth is there are several reasons why so few startups succeed over the long term.
1. Failure to create a good business plan
It has often been said that entrepreneurs don't plan to fail, but rather, they fail to plan. In fact, failing to develop a solid business plan is one of the top reasons that startups fail.?
Therefore, you should write a business plan prior to launching your startup.
The purpose of a business plan is to make sure that you have carefully thought out your venture. It needs to include significant market research about your niche and target audience. For example, it should assess the size of your market to ensure that there is a big enough opportunity. Furthermore, a good business plan will analyze consumer segments to verify that customer needs align with your company's proposed products or services. Also, it will analyze competitors in your niche to determine how your business will position itself, as well as how you will be able to compete most effectively.
From a strategic point of view, your business plan must include your marketing plan (how you will acquire customers), your hiring plan (who you plan to hire), and your operational plan (the key milestones that you plan to accomplish).
Then, once your company is up and running, you need to add the following specifics to your plan:
2. Bad management skills
While many people dream of launching their own company, many entrepreneurs don't make good managers. However, running a successful company means that you will have to successfully manage the venture. Otherwise, your startup will likely be doomed from the start.
For example, you have to hire and manage the team that will help you run your business. That means you need good people skills, because you will be "tested" every day by your staff. Furthermore, you need to be effective at managing the overall operation of your venture to ensure that customer expectations are being met.
Good managers are good at communicating a vision to their employees, as well as motivating them to achieve that vision. Instead of "bossing" their workers, they listen, teach, and encourage. In fact, don't see yourself as the "boss," but rather, a leader.
Strong management skills are also essential to fostering a positive workplace and company culture that keeps everyone motivated, productive, and goal-oriented. There have been countless good startup ideas that have become failed businesses because the founder was unable to effectively lead the company where it needed to go.
3. No defined target market
Entrepreneurs often fail when they fail to define their target market. While you might have a great idea for a product or service, you still need to know exactly who would benefit from your idea if you want it to be profitable. Since your proposed products/services likely fall under a specific niche, you need to first figure out who that niche serves. Then, you need to ensure that your product or service offerings are tailored toward that target demographic. Furthermore, your advertising campaigns need to be aimed at your target demo as well. Otherwise, you will just be blowing your marketing budget.
As mentioned, you should conduct in-depth market research on your audience while putting together your business plan. The information you gather from your research will help you define your target market.
4. Not understanding the needs of your customers
In addition to defining your audience, you need to understand the needs of your customers as well. More specifically, you need to understand how your products/services can solve their problems related to your niche.
For instance, let's say that you developed new accounting software aimed at small business owners. However, that's not likely enough on its own to compete against bigger bookkeeping software brands like QuickBooks. Therefore, what you would want to do is identify a specific need that QuickBooks doesn't meet. Ideally, it should be something that customers are aware of and are looking for a solution to solve. Then, you need to be the person who solves that unmet need so that your customers will want to buy your software.
Failing to understand customer needs means that you will be failing to exploit potential opportunities, and you risk falling behind your competitors.
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5. Poor cash-flow management
If accounting is the "language of business," then cash is its lifeblood. Without enough cash on hand, you won't be able to pay your employees, suppliers, and creditors, as well as keep the lights on. Poor cash-flow management practices are another top reason why so many startups fail. Young companies run by inexperienced owners tend to burn through cash quickly:
In addition to the above-mentioned bad money moves, a lot of passionate entrepreneurs are much less passionate about record keeping. Unfortunately, if you don't properly track your revenue and expenses, you can put your company in a bind by running out of cash.
If you don't have a lot of cash-flow management experience, you need to hire a good accountant or bookkeeping firm to help you manage your startup's cash. While you might dislike spending the money on accounting services, it can actually make you more money in the long run.
6. Failing to adapt to change
Change is the name of the game when it comes to the world of modern business. That means failing to adapt to change increases the odds that your startup will fail. For example, Sears once dominated the American retail industry for over 100 years. However, the big mistake that Sears made was ignoring eCommerce - the changing consumer trend from in-store to online shopping over the last several years. Instead, the former department store chain doubled down on its existing strategy:
In the end, Sears went bankrupt, in large part due to the company's resistance to adapt and embrace change.
Running a successful business requires you to be open-minded, especially when it comes to making changes to how you run the company. You can't get stuck in the mindset of "this is the way that we have always done things." Instead, you need to adopt the mindset of "how do we need to adapt to be successful in the future?"
7. Weak sales
As mentioned, cash is the lifeblood of a business. That means your company must generate enough sales to generate the cash needed to fund its operations. Otherwise, your venture will just be another failed statistic. Unfortunately, nothing you do can guarantee strong sales - not even the best business plan, market research, and talent. However, while these things can't guarantee success, they can help set you up for success. For instance, knowing your target market well means that you can fine-tune your marketing campaign to directly appeal to your audience. Therefore, you increase your odds of converting prospects into sales by knowing how to advertise to them.
It just can't be stated enough how important business planning and market research are before launching a startup. Furthermore, you might have to experiment with different pricing strategies to see which price points generate your most profitable sales.
8. Unsustainable growth
While poor sales can put you out of business, growing too fast can surprisingly bankrupt your company as well. That's because it takes a lot of cash to fund growth. For instance, growing sales require more inventory and employees - both of which require more money. You might also have to invest in a bigger facility, or even multiple facilities. Therefore, instead of growing as fast as you can, you should actually focus on sustainable growth - growth that won't burn through all your cash.
A business consultant can likely help you plan and execute a sustainable growth strategy. While you might look at it as another expense, it could turn out to be a good investment if it helps your startup grow and be profitable.
9. Bad inventory management system
Many companies have gone under with stock rooms full of unsold (dead) inventory. Think back to the example of Sears. The department store was ordering way too much merchandise than it could ever sell in an attempt to appeal to all customers. What ended up happening was that the company had too much money tied up in its unsold inventory at the end of each year. Therefore, it had to unload the merchandise at a steep loss. Sears made up for those losses by borrowing more money to fund its operations. Eventually, the huge losses and debt led to bankruptcy.
While too much inventory can bankrupt you, having too little inventory can cost you sales as well. For example, if you are constantly out of merchandise that your customers want to buy, they will end up buying it from your competitors. Furthermore, you risk losing their business in the future by failing to offer what they need/want.
Therefore, you have to develop a good inventory management system that will ensure you have the right amount of inventory based on customer demand. How do you do that? By using sales data to forecast future sales. Many owners hire business consultants or financial analysts to create sales forecasts used to inform their inventory management decisions.
10. Too wide of a scope?
Many entrepreneurs make the mistake of thinking that they can be "all things to all customers." Unfortunately, having too wide of a business scope is bad for startups. You won't likely be profitable in the long run. In fact, you will likely go out of business. Think about your niche. What core things are you really good at? Your brand's scope should be focused on that core set of product or service offerings. A narrower scope will also help you generate more profitable sales - as many entrepreneurs will tell you that not all sales are profitable.
In short, most entrepreneurs never plan for their business to go bankrupt - and that's a big part of the problem. While there is no way to guarantee that a startup will be successful, careful planning and good market research can help set you up for success. You still need all of the "entrepreneurial stars" to align as well. For instance, you need to find a good team to help you run your company. You also need strong enough sales to generate a solid cash flow. Your business needs to grow, but not too fast. Essentially, you have your work cut out for you as an entrepreneur.