If you’ve recently launched your startup business or have plans on doing so in the near future, you’re probably eager to reach your desired level of success. Although it can take some entrepreneurs a significant amount of time to grow their businesses, it doesn’t have to be that way for everyone. Startup businesses can ramp up sales and revenue pretty quickly. There are a number of ways you can increase the chances of your startup business becoming profitable in just a few short years. Firstly, it’s important to know why most startup businesses fail. Secondly, it’s important to know how other startup businesses succeed and how you can do what they do to increase your chances of success.
Why Startup Businesses Fail and Succeed
At least 90% of startups fail. It’s a profound fact that no aspiring entrepreneur should ignore. The more you learn about failing and succeeding in business before you start, the more knowledge you can apply when you do start (so you can get it right the first time). My goal is to educate you so you can accelerate the growth of your startup business and avoid wasting precious time. Here are a few reasons why your startup business may fail or succeed:
No one wants (or needs) what you’re selling – Before your launch a startup business, you have to be sure there is a market for what you’re selling. According to an article by Fortune, the top reason a startup business fails is because it offered a product or service that no one needed or wanted. You may have a great product or service idea but if no one has a need (or desire) to have it, you won’t make a penny. You don’t have to create a unique product or service to get people to buy it. You can offer an existing product or service in a unique way and capture significant market share. If you want your startup business to succeed, research your desired industry before you make any final decisions. Sites like IBISWorld and FirstResearch provide great industry reports that will give you an idea of whether or not your proposed startup business can be profitable.
Straight out of funds – Lack of capital is another major reason why startup businesses fail. A survey of business owners, reported in an article by Fortune, found that this was the second highest reason for startup business failure after “no market need.” According to Gallup, most startup business owners fund their business with their personal savings. However, the second most popular way to fund a startup business is debt financing. I actually suggest that startup entrepreneurs save their personal funds and start with debt or equity financing if possible. Starting with debt or equity financing takes some of the risk off of you. You’re able preserve your personal funds if you start with debt or equity.
Contrary to popular belief a startup business owner can get debt financing. Unsecured business lines of credit and microloans are the most accessible types of debt financing for startup business owners. If you decide to go the debt financing route, you’ll likely be able to get an unsecured business line of credit or microloan if you can meet the credit score requirements.
The risk of running out of capital is also why it’s so important to understand your industry before your launch a startup business. Proper planning will help you understand if the business will have a customer base and how much money you will need to spend to get customers and operate the business. You have a better chance of not running out of capital if your startup business has a customer base and you spend the money you borrow wisely.
You try to do it all alone or your team just sucks – Trying to do everything yourself is the quickest way to fail. Your chances of failure are the same even if you have a team. Incompetence is a big reason why startup businesses fail. Poor leadership can be prevented if everyone truly understands the business industry, how the company should operate, and works to together to make sure things get done right. Your team has to be fully invested in the growth and success of the startup business. Effective communication is required and time spent developing the business has to be productive. If there is one person who doesn’t communicate well, isn’t fully invested in the growth of the business, or isn’t productive, your chances of failure skyrocket. Get rid of all dead weight as quickly as possible (and do it legally).
Accelerated Startup Business Growth is Possible
The bottom line is, the success or failure of any business isn’t guaranteed. No matter what you do, the chance of failure will always be there. However, if you educate yourself and properly prepare before you launch your startup business, chances of success can increase and growth can be accelerated. The success and fast growth of your startup business all depends on execution. Make sure your startup business idea is scalable and has a market (by conducting industry research), figure out how much money you’ll need, how it will be used and where you’ll get it, and lastly build the right team. All of this is easier said than done but it’s more than possible.
4 Other Causes of Startup Business Failure & How to Avoid Them
Incompetence – According to Statistic Brain, the specific pitfalls associated with incompetence include emotional pricing, living too high for the business, non-payment of taxes, no knowledge of pricing, lack of planning, no knowledge of financing, and no experience in record-keeping. About 46% of new businesses fail within the first five years because of these reasons. To avoid making the mistake of emotional pricing or having no knowledge of pricing and lack of planning, it best to develop a business plan first.
A business plan should include industry and target market information. Accurate industry and target market information can be obtained from sites like IBISWorld and U.S. Census Bureau’s American FactFinder. The data you obtain from these two sites will help you choose the right pricing for your product or service and target the right audience. The key to avoiding these mistakes is knowing your target customer and understanding your industry. A business plan will also serve as a roadmap for how you will operate and grow the business. Better planning can minimize your chances of startup business failure.
In regards to living too high for the business, non-payment of taxes, no knowledge of financing, and no experience in record-keeping, the best way to avoid these mistakes is by living below your means, keeping a Legal Certified Public Accountant on your payroll, and utilizing tools such as a Google Apps for Work and a Customer Relationship Management system (CRM) such as Insightly.
Living below your means will be necessary when you own a startup business because you will have both business and personal expenses to cover. You will need to stretch every penny until you start getting results from the business. Keeping a Legal Certified Public Accountant on your payroll will help you budget properly and stay on top of your taxes. They can also direct you to someone who may be able to assist you with obtaining capital for your startup business (outside of your personal savings).
Tools like Google Apps for Work and Insightly will help you manage your day (i.e. tasks that need to be completed and appointments) and your customer information (i.e. contact information and sales). Consulting with experienced professionals like Legal CPA’s and using tools like Google Apps for Work will help you stay on top of your finances and improve your record keeping.
Unbalanced Experience or Lack of Managerial Experience – According to Statistic Brain, the specific pitfalls associated with unbalanced experience or lack of managerial experience include poor credit granting practices, expansion too rapid, and inadequate borrowing practices. About 30% of new businesses fail within the first five years because of these reasons. To avoid making the mistake of poor credit granting practices, I suggest vetting your customers before putting them on a payment plan. This means checking their credit history to determine their likelihood of paying you on time. I also suggest getting as much of your money upfront as possible.
In regards to rapid expansion, this is tough one. I suggest having an emergency plan for rapid expansion. Write down what you will need if the business grows fast and what resources you will use to fulfill those needs. Knowing what resources you will need (and making sure they are available when you need them) may make it easier for you to handle expanding rapidly. Resources may include people (i.e. employees or contractors), additional capital, inventory and/or supplies, etc.
To avoid inadequate borrowing practices it’s important to have a thorough understanding of the expenses associated with operating your startup business so you will know approximately how much working capital you need to sustain it. Understanding your working capital needs will enable you to borrow enough to cover your expenses.
Lack of Experiences in Line of Goods or Services – According to Statistic Brain, the specific pitfalls associated with lack of experiences in line of goods or services include carrying inadequate inventory, no knowledge of suppliers, and wasted advertising budget. About 11% of new businesses fail within the first five years because of these reasons. To avoid making these mistakes, I suggest better planning. Researching your industry and studying your competitors business models will give you a better idea of how much inventory to carry, who the best suppliers are and the most effective marketing techniques for your products or services.
Neglect, fraud, disaster – About 1% of new businesses fail within the first five years because of these reasons. To avoid making these mistakes, I suggest being as attentive as possible to your business. Most startup business owners work 12 to 14 hour work days in the beginning. It sounds like a lot but it’s necessary to stay on top of things until you can build a trustworthy team to assist you. Also, conducting background checks on potential business partners, employees, and/or contractors may help you avoid experiencing fraud.
The Bottom Line – No Startup Business is Guaranteed to Be Successful
The bottom line is, the success of your startup business is not guaranteed but there are things you can do to prolong its failure or sustain it on a long term basis. Implementing my suggestions will help. Ultimately, better planning will make for a startup a business that is more likely to be successful.