The journey toward entrepreneurial success can have many ups and downs. If this is your first company, it may be challenging to differentiate between the tough times that every startup experiences and the more profound problems that cause a business to fail.
In this post, we discuss some of the common reasons that startups are unsuccessful. One of these mistakes alone may not mean the end of your business, but if you’re making a combination of these errors, then it may be time to move on to your next endeavor or make some changes before it’s too late.
1. No market need
Successful companies offer people a compelling reason to purchase their product, and add value to customers’ lives. According to CB Insights, the number one reason for startup failure is a lack of product need.
Initially, many companies struggle with the execution of their product, and need to make a few revisions before finding the right product and market fit. Sometimes, the product may even need a complete re-design. Another possibility is that the product simply doesn’t solve a large enough market problem, in which case using all your resources to perfect it could be a wasted effort.
Dave Sloan did everything right with his startup, Treehouse Logic, including developing a great product. According to Sloan, the company failed because “we were not solving a large enough problem that we could universally serve with a scalable solution.” In other words, Treehouse Logic didn’t have the sales to become profitable.
If all of your efforts have failed to acquire customers (or even generate interest), the market is clearly telling you it doesn’t need your product.
2. You’ve run out of cash
It’s true that you need to spend money to make money, but what if you have no money?
Many entrepreneurs have minimal personal savings to invest in the business, or fail to secure capital from crowdfunding websites, investors, or even family and friends. If you’ve pitched to investors time and time again and have yet to obtain funding, it might be time to question the viability of your business. If an investor doesn’t see the potential, how will the market respond?
Another possibility is that you managed to secure funding, but spent it too quickly or didn’t allocate the funds properly. For instance, some entrepreneurs invest heavily in inventory in anticipation of growing sales, only to have it sit in storage for weeks or months, not earning any money for the business.
A further mistake that startups like RewardMe make is scaling too quickly. The company was unable to maintain or improve their profit margins fast enough to offset operating costs, and simply ran out of cash. “Cash is king, and you need to extend your runway as long as possible until you’ve found product market fit,” says founder Jun Loayza.
As the founder, one of your jobs is to understand and manage your cash flow. Without investment or revenue from sales, your startup can only survive for so long before running out of cash.
3. Poor marketing strategy
Maybe you know there’s a need for your service, or that you have a better product than what’s on the market, but how do you convey that information to the public? Marketing is all about finding and retaining customers, and can play a crucial role in your success. Nevertheless, it’s often overlooked or poorly planned by early-stage startups.
Pawel Brodzinski’s experience with the failed startup Overto is a telling example: “[W]e hit the ceiling of what we could achieve effortlessly. It was time to do some marketing. Unfortunately no one of us was skilled in that area. Even worse, no one had enough time to fill the gap.”
Failing to invest in marketing can result in your company struggling to acquire customers and keep up with competitors, and can ultimately cause you to fold. Some common mistakes include:
- Targeting too wide of an audience. A common mistake is believing that everyone is a potential customer and consequently, losing out on finding the right customer.
- Pricing that drives customers away. If your product is too expensive, you run the risk of alienating your target customer. Conversely, pricing your product too low may cause people to question its quality or value.
- Failing to create a buzz. You can’t afford to ignore social media marketing, which can increase your organic sales, demonstrate proof of concept, and make you stand out from your competitors.
4. Competitors have the upper hand
Whether you’re the first to market or entering a mature space, a common mistake is to ignore the competition, which may result in falling behind without knowing it.
If you’ve successfully launched a new product, it’s only a matter of time before similar products will appear on the market. Your challenge is to prevent new entrants from gaining too much traction.
Conversely, if you’re entering a mature space, you need to learn what your competitors are doing in order to set yourself apart. The quality of your product or its unique selling feature may not save you if your competitors can afford to run flashy advertising campaigns, set lower prices, and hire a bigger sales team.
If you’re not in a position to lower your own prices and increase your marketing budget, you could fail to secure market share.
5. Failure to adapt
Markets can be unpredictable, and it’s difficult to keep track of trends, competitors, supply and demand, and changing distribution models. However, it’s your job to keep informed of market fluctuations to better predict how your business will be affected and adapt accordingly.
Startups can fail when they don’t recognize the need to adapt, or pivot, before it’s too late. Take the company imercive as an example. By the time Keith Nowak realized he wasn’t getting the proof of concept he needed, he had run out of capital. “If we had been honest with ourselves earlier on we may have been able to pivot sooner and have enough capital left to properly execute the new strategy. I believe the biggest mistake I made as CEO of imercive was failing to pivot sooner.”
Have you reexamined your original vision, adapted to changing technologies, or altered your business model? It’s your job to adapt your business to the market, because it won’t adapt for you.
6. Poor team dynamics
Having a business partner can make the process of starting and building a company easier. In fact, many entrepreneurs and investors agree that having a co-founder will more likely lead to success.
However, investor Paul Graham warns entrepreneurs to choose their business partners carefully.
“Most of the disputes I’ve seen between founders could have been avoided if they’d been more careful about who they started a company with,” he says.
Conflicts can easily arise when business isn’t going well. It’s common for co-founders to disagree over strategies to save the company, or allow personal disputes to get in the way of more important things, including what’s best for the customer.
If you can no longer agree on the company vision or make day-to-day decisions together, one of you should consider exiting before the business falls apart entirely.
7. Loss of passion
Experiencing boredom or a loss of passion in the early stages is a strong indication that your startup will fail.
Most founders of successful companies quit their day jobs to give the startup their full attention. If you haven’t taken the leap yet, it may be a sign that you don’t have the all-consuming drive and dedication it takes to see the process through.
As the founder, you’re the company’s strongest advocate. If you lose your passion for the business or no longer believe in the product, you can’t expect confidence from your team or loyalty from your customers. Your declining interest will show in how you run the company and can eventually lead to its demise.
Learning from your mistakes
Many entrepreneurs overlook the early warning signs that their business is declining. It’s difficult to admit that your company will fail, but you’re not alone. The vast majority of entrepreneurs experience failure with their first (and even second, third, or fourth) startups. Many learn from their muddles and missteps, and go on to build successful businesses.
Why did your startup fail?