Fifty percent of all new businesses will fail within six years. If you are a business owner, especially in the early stages of a start-up, this figure should make you sit up and take notice!
In view of this failure rate, you should be keenly interested in why they failed. It would seem reasonable and prudent to fully understand the main reasons companies succumb, and to then address those reasons in your business planning process, as appropriate, with the goal being to help mitigate their potential for wreaking havoc on your vision.
There was a recent in-depth review done which identified the top 20 critical drivers of business failures. In the study, multiple reasons for failure were identified for most of the companies evaluated.
As a leader of a start-up, you must ask yourself the correct questions in determining how each of these 20 issues might relate to your specific circumstances. This article was written with the sole intent of bringing these 20 issues to your attention, with basic key points and ideas presented, to help you in planning for a successful business launch.
Not every one of these issues is relevant to every new company, but each one of them has played a role in yielding business downfalls. The percentage figures shown below for each topic represents the number of companies which cited the specific driver in their list of failure causes. It does not connotate relative importance of a driver in the context of the individual failures, but rather the frequency of a given reason being cited as “one” of many issues involved. These 20 reasons are equally split between subjects normally covered in a typical business plan and items which are NOT.
- Demand for the product was not adequate – 42%. You must plan to provide a product or service people: want, need, or you have figured out an infallible way to create a demand for. Building a product, which either does not have, or will not create, adequate “demand” in the eyes of the market place is doomed from the start.
As a leader, in your business planning process, you must make sure you have more than just a great vision. You must have a saleable product, at a saleable price, which is well-defined and has been fully evaluated during the planning process. You must figure out in your plan how your product is going to satisfy your customers’ needs better than your competition. Based upon your product or service, you may need to plan for, and consider, some type of test marketing trials. You may want to run your marketing analysis under more than one set of assumptions to be able to confirm your ability to sell your product. You must plan for such evaluations to be thorough, and completed, before you get too far under water.
In addition, you must also comprehend the importance of, and need for, your plans to be flexible enough to adjust to changes in consumer demand along the way.
- Inadequate cash flow – 29%. Start-ups run out of cash for multiple reasons:
- Initial sales, anticipated to create an influx of cash, fall short of projections.
- Sufficient funding was not on hand to begin with because of incomplete planning, miscalculations, or unanticipated problems.
- Available funds were not judiciously allocated, based upon poor decisions or poorly defined priorities.
- Additional funding required, to adjust to a shift in market conditions, could not be secured.
As a leader, you must understand money and time are finite. Your business plan, when executed, must produce a product which comes on line and starts generating a sufficient revenue stream before start-up funds are exhausted. The planning phase is the time to identify and resolve any cash flow concerns, not after you have started into production.
- Not the correct team members – 23%. Having the correct mixture of knowledge, skills, abilities, personalities, and experience on your whole team is crucial to your company’s success. You need a balance of competencies, capabilities, and points-of-view in the founding group/team members to put the pieces of the puzzle together quickly and start generating needed revenue. Without this balance in backgrounds, diversity, and personalities, which will develop a solid system of checks and balances, it is more likely your fledgling venture will veer off course into foreclosure.
Building your whole team by picking friends or relatives, based upon some perceived “loyalty”, rather than your company’s need for a solid mixture of skills at the helm, may be a critical mistake. As the leader, you have the role and responsibility of finding top-notch people to assist you in not only launching the business but running it as well. Your plan should somehow outline your need to judge and gauge the strengths and weaknesses of potential key members. Next, you must seek to fill known gaps in your founding group/team’s background with the correct additional mix of skills. This step should increase your whole group’s ability to yield a successful start-up. Finally, you should have a defined strategy, developed and ready to implement, to “facilitate” and “lead” your diverse group through the steps in starting-up, chasing, and ultimately achieving your vision.
- Outcompeted – 19%. So, you are great at what you do. You come up with a perfect new product, start a good company, and begin raking in money. Then, out of nowhere, you are blindsided and surpassed by a Johnny-come-lately in your niche. They leave you in the dirt, as they roar into “your” future, with a more cost-effective product version and higher levels of customer satisfaction.
When a market idea is hot, venture capitalists and hungry, savvy business people will come calling with a mission every time. They will search hard to find what you have overlooked, or forgotten to consider, in your business model. Ignoring this potential, contributed to 19% of the business failures.
Part of the reason it is called a “free market” is competition drives, innovation, improvement, and prices down. If you do not keep your goals fixed on anticipating your customers’ needs, satisfying those needs, providing your product at the best value, and have one eye on the business environment around your start-up, you could be setting yourself up to be blindsided.
As a leader, if your proposed company is vulnerable to competition, the place to start mitigating this issue is in the planning process, not after your competition has started gaining on you. You need to consider:
- What areas of susceptibility you have to competition, and from whom
- How to protect trade secrets
- How to monitor changes in market conditions or business environment
- What you may have overlooked in your product or operations which could be used as an advantage by someone else
- How you will monitor consumer satisfaction with your product once you are operational
- How you are going to instill a company culture, with an ingrained drive and determination to seek constant innovation and improvement, to help prevent threats of competition from becoming an issue
- Pricing/cost issues – 19%. Determining prices for products is not always an easy calculation, even when making common widgets, like a bolt, or pen, or ream of paper. Consider for a moment the daunting task of costing for a “minute” of service in the technology era: for a specific new application, new type of smart phone, or operating a new data analysis platform you wish to generate revenue from. As a start-up, are you going to evaluate costs and pricing of these services based upon: 100,000 users, 1,000,000 users, 10,000,000 users, or somewhere in-between? Even with the greatest concept, the slightest misstep in product pricing which results in a perceived “overpriced” situation by users, could easily lead to underperformance and significant revenue loss.
As the leader of your start-up company, it is critical you spend an appropriate amount of time and energy up-front understanding costs and pricing in your business planning process. You need to make sure you have a solid handle on:
- What it is going to cost per unit to deliver your product
- What price consumers are willing to pay per unit
- The number of units you expect to sell at said price
Seems like common sense, but again, almost 1 in 5 firms cited issues with pricing as a reason which contributed to their demise. There are numerous pitfalls. They are going to be contingent on your specific product and market. Doing your homework before hand is essential.
If you have a brand-new product, then planning to conduct test marketing is one possible option. There is also a whole realm of theories related to setting and evaluating pricing strategies which could help your team discern and solve this problem head on.
- Customers not satisfied with product – 18%. Most reasonable people would not strive to produce a poor product or one disappointing to users. But it has happened, according to the analysis done of failed businesses.
As a leader, outlining ways in your planning to ensure you are constantly focused on trying to meet or exceed your customers’ expectations is a key factor. Chasing some idealistic misconception or theory could be a sure-fire way to sail your company into a shipwreck.
To be successful, your planning must set the stage for your organization to provide a reasonable product at a competitive price. Trying to derive a profit through poor quality workmanship or inferior products is a recipe for disaster. There may be a few limited situations where consumers appear to make decisions only on the cost of a product. However, for the average consumer, some perceived value and satisfaction will also be associated with their expenditures. You must outline for your business venture a clear intent for satisfying your customers’ wants and needs, better than your competition, once you move into production.
- Great product, but no business model – 17%. A great idea is not enough. You must have a successful model detailing how you expect to create, deliver, and capture value in the market place with your product. If you are stuck within only one confined channel of customer capture, such as online sales with SEO, and your competitor is also successfully using social media, it could spell trouble.
Leaders are responsible for developing a business model which describes the mechanisms needed for their organization to grow and flourish in the face of competition. History is full of examples of models which have created mega-organizations such as: McDonalds, WalMart, Toyota, Home Depot, and Southwest Airlines. Your challenge is to define the appropriate model for your business, make it part of your plan, and be prepared to use that model to help your start-up succeed.
- Marketing failure – 14%. Most products will not market themselves. Human nature tells us many people who find their self-worth in: developing new, industry leading code; being capable of inventing new stellar products; or can foresee future consumer needs seldom relish the thought of being in the spotlight promoting their dreams to prospective customers. Just as important, as the leader, if you are focused on product development and user satisfaction during start-up, you may not have time to also deal adequately with marketing.
Your role as the leader is to make sure your organization has a clear plan focused on: finding, targeting, gaining the attention of, and successfully capturing customers. Your responsibilities include finding a marketing genius to be your closest ally in helping to develop and execute your plan, if required in your specific case.
- Not actively seeking customer input and being inflexible – 14%. If you and your co-founders are building a product for yourselves, it could be a fatal mistake. Tunnel vision, ignoring user feedback, or building a product which does not satisfy user expectations may compound this misstep. You must talk to clients, rollout features which will meet their desires, and not be tricked into thinking your product is perfect – the way “you” believe it should perform.
Leaders, during the planning phase, need to be in tune with how critical it will be to seek objective feedback, early and often during implementation. You may need to plan for, and conduct, beta testing of your product. You must plan on spending adequate time talking with users to understand their interests, concerns, desires, and needs and then adapting appropriately to meet them. You must plan to seek and incorporate user input in: resolving problems, helping to gain traction, and setting priorities for rolling out new features.
- Launching too early (or too late) – 13%. The last thing you want to do is launch before you are ready to meet customers’ expectations with your new product. If there are still bugs in the system, even if your product is a spectacular idea, customers will remember the problems and not the promises. First impressions are everything, and they last for a long time.
By the same token, if you launch too late, you run the risk of missing your window of opportunity. If you hesitate, your competition may have the ability to gain insurmountable traction.
With the lightning speed of inventions and innovations in many areas, those who hesitate may be lost in the dust. As the leader of your start-up, somehow in your planning you must understand:
- When the window of opportunity is going to open for your product
- How long it might stay open
- Where you need to be with product development and production when said window opens
- Losing focus on the purpose and need for the product – 13%. Changing vision mid-stream, being sidetracked, having personal issues become your priorities, losing interest, or lacking focus can create gloom and doom for your new enterprise.
As the future leader of your company, in building your business plan, you must be upfront and honest with yourself, investors, co-founders, possible board members, and future employees. You need to make sure you have:
- The willingness to adequately prepare a plan for your success
- The ability to stay focused on launching your chosen venture
- The grit needed to stay on track, execute, and bring your vision to life
The time to determine your level of commitment is in the planning phase. Waiting to figure this out, until after you have invested your time, energy, money, and other people’s money into a failing venture, is not a sound business decision.
- Disharmony with co-founders/team or investor group – 13%. Distinct departures in direction between co-founders, team members, or with your investors; ignoring co-founders/investors demands; or yielding too much to those demands are all potential speed bumps in the road.
As the leader, it might be hard to envision just when, or where, a co-founder/team disharmony speed bump might show up. If you have not prepared for this possibility in your planning process, a discord could send a jolt through your entire organizational structure when it happens.
- Clearly articulate the mission and direction of your company
- Take steps to define the roles and responsibilities of co-founders and other team members
- Make sure everyone has agreed to those roles
- Make sure everyone has also agreed to the terms and conditions for dismissal of a co-founder/team member for cause
This may not be an easy task, but it might well become important should an unexpected issue arise.
The same type of planning on how to deal with departures in direction between you and your investor group is equally important and potentially even more critical to your future. Suffering an unexpected loss of capital when an unresolvable issue enters the picture with your investors, could mean curtains for your new enterprise. As the leader, it is your responsibility to make sure the risk of discourse with your investors has been minimized. This must be done with: a well-researched and thought-out start-up strategy; a well-defined business plan; and a solid contract with your investors. These three items must reduce the potential of your investors wanting to meddle in the details of your operational affairs in the first place. The terms and conditions of their involvement in your business decisions, if any, must be clearly and fully articulated upfront in writing. The investors’ contract must protect your company and provide your investor group with a reasonable rate-of-return at a minimal risk.
- Pivot gone bad – 10%. Changing direction without sound supporting data and rationale may lead your company down a dead end road. There needs to be a defendable rationale for a pivot before changing direction of a start-up. It needs to be calculated and include appropriate modifications to the business model. Concepts will need to be tested and results predicted.
With the rate of change in the world, making an unexpected modification to where your new start-up might be heading is not outside the realm of possibilities. However, you must be prepared to fully investigate the need for a pivot to be able to make the correct decision. Conducting a thorough examination will allow you to make a needed modification, armed with a solid, defendable plan-in-hand. Setting out in your business plan, qualifiers and concepts on what to consider, measure, and evaluate, if faced with an opportunity, or need, to pivot will pay dividends if a question arises. As important, these same criteria would also help set the stage to adequately review and fully comprehend a “perceived” issue on the horizon which might prevent a “bad” decision to pivot, when a pivot was not justified.
- Lack of knowledge, passion, or expertise in a field or industry – 9%. Going off on a tangent to solve a perceived problem or to develop a “perfect” (in your mind) product, without first fully understanding how said item will fulfill a purpose within the industry, is a risky proposition. If your widget does not meet the needs of the users better than an existing product already does, you may have just missed the boat. It will not sell, and it will not be used. This type of mistake could cost you a significant amount of time and money.
As the leader, developing a business plan which channels your passion, time, and energy into developing a product which outperforms existing widgets and thus provides a better service to prospective customers is a much better approach. To accomplish this, you must fully understand and embrace the details of the process you are trying to enhance, and the users’ needs for a better product within the industry.
- Bad Location – 9%. Being separated from undeveloped portions of your market, or sources of your talent, are both potential business slayers. One has to do with an unseen, unplanned, or physical infrastructure boundary to the acceptance of your product. The other has to do with the location of your likely employee talent.
Even in this day of social media and instant communications, some products and services still have unseen boundaries to the normal evolution of product acceptance and adoption outside your local area. Part of this could be related to a heavy dependence on local business connections and personal networking for your initial success. Part of it could come from scaling your approach, ideas, and delivery to only local markets. Identified limits created by infrastructure barriers, if your product has adequate value, can normally be resolved.
In your start-up planning, as the leader, you must identify and consider these kinds of possible barriers specific to your situation. You must then, plan to mitigate, eliminate, or overcome their potential impacts to yield a successful outcome.
New communications technologies and where sources of certain types of skills and talent reside, have resulted in higher rates of companies utilizing remote teams/team members to develop and implement their mission and direction. This can create challenges for your start-up.
If using remote employees is in the cards for your company, as the leader, you must outline ways to calculate, and recruit for, the required skills you will need. Then, you must plan for the reality of communicating with those employees, knowing it is plausible you will never be “face to face” with some of them. You must plan to develop and build into your culture the need for effective communications company-wide, including with remote employees. You must plan for fostering important operational concepts and objectives, such as “teamwork”, across hundreds of miles of communications links, vs., having the ability to conduct a teamwork training session in your conference room. You may need to identify and plan to execute administrative measures to resolve hassles related to payroll, unemployment insurance, health benefits, or taxes with employees spread across several states.
- Limited, or no, investors or financing interest – 8%. A limited potential for profitability in a product, or profitability not being presented to investors in an effective, convincing manner, is an issue directly related to inadequate cash flow already discussed. However, it was taken one step further in this reason for business failures. Cited was an explicit lack of investor interest in providing planned, additional seed money during start-up or a lack of interest in the product to begin with.
As the leader, it is your responsibility to have a solid product to offer. In your business plan, you must:
- Fully articulate your justification for “why” you believe the product will be profitable
- Show how you evaluated profitability
- Explain the bottom line numbers which substantiate your claims
- Convince savvy, knowledgeable investors your proposal is a wise investment option for them
Then, you must also be prepared to perform as predicted after launching.
- Legal challenges – 8%. These can arise from:
- Patent or copyright infringements
- Moving into new fields
- Moving into new markets
- Expanding to international markets
When a start-up suddenly gains traction and is moving forward, what seemed like a simple idea can sometimes become very cumbersome. When someone else feels your success has somehow been derived by infringement on their proprietary product or idea, strong headwinds may be coming your direction. Difficulties may also arise if your product or service charts its way into unexplored legal issues and/or is a significant threat to an existing, well-entrenched industry. As an example, consider what Uber must pay in legal costs each year.
Legal concerns can:
- Quickly sap much needed start-up funds
- Divert a huge amount of time and energy away from critical issues
- Result in damaging judgements against you
As a leader of your start-up, during your planning process, you must make sure you do not have any potential legal problems staring at you from afar. If you do have them, they must be mitigated, resolved, or adequately addressed upfront. Furthermore, if a pivot is required to sustain reasonable growth the same cautions apply. Before plowing off into a different direction, utilizing concepts and criteria laid out in your original plan for surveying the legal landscape beforehand, could help to stave off a disaster in executing a pivot.
- Not using networks/investors to help establish the business – 8%. This one seems like a no-brainer, but again it was cited by the study. As the leader of your company, planning to use your networks, as well as asking your investors, to pass along what a great product you are going to produce makes perfect sense. Do not make the mistake of thinking you have to do everything yourself.
As the leader, you must plan for your investors to be involved from the start. You should include this expectation into your plan for them to see. When the time comes, you must plan to ask them to give you as much help as possible. Your business plan must also outline a well-developed basis to make use of your networks as well as the networks of your co-founders and team members.
- Burnout – 8%. Not maintaining a good work/life balance and trying to juggle between too many tasks as you are starting out results in a high-risk situation. The probability for burnout, plays right into the need to have a diverse, driven team in place to help make your start-up a success. One of the best ways to prevent burnout is in planning to share pressing workloads with co-founders and other team members.
In your planning as the leader, you must:
- Set priorities
- Define criteria to help identify and focus your energy on the most important current issues
- Identify key launch milestones
- List the steps in your production process
- Foresee potential operational bottlenecks
- Outline concepts for knowing when to cut your losses if you hit a dead-end
You must develop a mitigation strategy for effectively dealing with crucial periods during start-up. In addition, consider hiring freelance specialists for essential timeframes to adequately cover workloads.
Planning to utilize all these ideas will help in: reducing the potential of spreading yourself and your co-founders too thin; minimizing the risk of missing something critical; and preventing burnout when the time comes.
- Failure to perceive and execute a needed pivot – 7%. Failing to comprehend the need to pivot or not executing one quickly enough could let the air out of your tires. Staying with a poor design; not perceiving an adjustment in the market; or not moving away from a bad strategy, decision, or product may leave you, your employees, and your investors frustrated with the lack of progress toward sufficient revenue production.
Once again, planning upfront and being aware of your role as the leader will help. Perceived adjustments in your market’s horizon; apparent shifts in user expectations; or rumors of an industry changing innovation could underscore the possibility of your start-up needing to size up and possibly execute a pivot to stay on track and survive. Leaders are not only responsible for monitoring the business environment which might foretell the need for a pivot, they are also responsible for preplanning for a potential pivot, if changes do occur. In the same general context, as in trying to prevent a “bad” pivot, in your business plan the covering of: concepts, possible triggers, criteria, and basic procedures to follow will help you and your team to monitor, evaluate, decide upon, and then successfully institute a pivot quickly if needed.
The ability to accurately predict the future eludes most of us. However, you have an opportunity to gain insight from these 20-business failure – “lessons learned” and apply them to your own start-up’s specific situation. Those who do not learn from history are more likely to repeat the mistakes of the past. Hopefully this discussion of the top 20 reasons for business failures has provided you the insight to help in planning to avoid these possible pitfalls and thus turn your dreams into a successful and sustainable business venture.
- CBINSIGHTS: The Top 20 Reasons Startups Fail. September 27, 2017.