Why startups fail – and how to avoid it

Why Startups fail - and how to avoid the same fate

As a first-time founder, the statistics that saturate the media surrounding the number of startups failures can be a little unnerving.

There's no denying, it is a real challenge to start from scratch and grow an entire ecosystem out of nothing but an idea. That said, when you start to drill down to the factors that determine success or failure, there are some valuable takeaways.

If you have one of those exciting ideas, something that you’re deeply passionate about and you know will have a real impact, you’re off to a great start. From here, the first step is understanding why startups fail in order to avoid experiencing it yourself. While every startup has a unique story - whether that be one of triumph or disaster - there are definitely some recurring themes for the businesses that don't last the distance.

The trick is to know which common factors can cause failures and learn the valuable lessons from these frequently seen mistakes to avoid them happening to you.

Failure number one: A lack of research

As a startup founder, you’ll probably believe what you’re selling is the best thing since sliced bread - otherwise, why would you be backing yourself to build a business around it? Most expect their idea to be overwhelmingly popular from day one.

This simply won’t happen.

So many startups fail, initially, not because they lack investment, but because they’ve not conducted sufficient research into the market they’re planning to launch into. You may feel like your product solves a very real problem for your target audience, but your target market may feel the problem doesn’t need solving at all, or that it does exist, but they don’t want to pay to fix it.

You won’t know the answer to these questions until you conduct your own market research. Research reports can be expensive so use university papers and blog posts, customers and business associates as a sounding board.

Once you know you have a market, you need to make sure you get everything else correct pre-launch.

Failure number two: Inadequate planning

There are a million adages about a lack of planning, but one that rings true is ‘failing to prepare is preparing to fail.’

It’s certainly very relevant here. 

You need a solid business plan that stands up to scrutiny. Is your pricing competitive? Is there an adequate profit margin? Are your future plans realistic? What evidence do you have that supports that?

It can be difficult to step away and take an objective view of your business plan, but it's an absolute must. Take off those rose-tinted spectacles and approach it from the perspective of a hardened investor who won't easily part with their cash.

That's not to say you should eviscerate your ideas or strategies, as being overly self-critical could have negative effects on your long-term passion for your project. You must however, be fair and measured, identifying areas of weakness to improve, and points of strength which you can build on. And don't forget, another pair of fresh eyes, belonging to someone who has no stake or interest in your startup, could identify issues or positives that you'd never see yourself.

Failure number three: Mishandling paperwork

It’s a real shame so many startups fail due to such a seemingly minor error but it’s unfortunately startlingly common. If you need to invest in professional advice, the do it! An initial outlay now could save you from disaster in the long run. Getting your legal and fiduciary matters in order is an absolute must. Failure to do so is an easy way to throw your dream away before you’ve begun.

Failure number four: Poor financial management

No startup founder is motivated to start a business by the prospect of managing their finances. It’s not what gets entrepreneurs out of bed in the morning and it’s probably not where their expertise lies (unless you’re in the financial sector).

But poor financial management - not being clued up on things like cashflow, working capital, profit and loss statements and all the other financial necessities - is a serious risk to your business. You don't need to be an expert, but you do need to be competent when it comes to understanding finances.

If you’re completely clueless when it comes to those all important numbers, you should definitely engage an accountant as soon as possible. You should also try to make an effort to understand the finances yourself, as it really helps to be able to identify what you’re doing right, wrong and what you need to improve, even at a high level. Particularly where investors are concerned, ignorance is no defense.

Failure number five: Relying on me, myself and I

You know your idea inside and out. You’ve lived and breathed it for months.

At this stage, it can be really difficult to pass the reins to someone else. It’s easy to justify this by believing no one will understand your business like you do, and founders are supposed to work every hour under the sun.

All this will do is lead to burnout, overlooking important issues or failing to hire an expert at the point one is needed.

As your business grows, you should build your team and invest time into finding the right people for you and your company.. Make sure they’re on the same page as you and can bring necessary skills to your team. It can be a huge wrench to hand over responsibility to someone else but you'll soon find that having others who are helping to lead frees your time up to concentrate on the aspects at which you excel.

Failure number six: Waiting for customers

You need to market your business. It seems silly to say, but if you tell no one about your business, no one will buy from your business. It’s a scarily common reason for startup failure, but so much effort goes into product development that sales and marketing can become an afterthought.

This is where you will be able to grow – and this is likely where you would greatly benefit from external advisors or consultants bringing their expertise into the business. Social media, website, advertising, PR – cover as many bases as your budget will allow and shout about your new startup from the rooftops.

Failure number seven: Avoiding change

You want your business to go from point A to point B, from great idea to multi-million dollar business, in two easy steps.

But the likelihood is, you’ll hit a lot of bumps in the road.

Prepare for challenges, and the responses this will need, before you launch. You’ll make mistakes, you will fail, you’ll miscalculate. What is most important is that you bounce back from these setbacks, learn from what you did wrong and persist.

Examining the reasons for failure is one of the most challenging things you will have to do as a founder, but it is one from which you will learn valuable lessons. Make sure you’re ready to persevere through all of the ups and downs along the way on your startup journey, even if it means having to start all over again. After all, experience (whether good or bad) is the best teacher.

There are hundreds of experienced advisors on the Connectd network who specialise in helping early-stage founders to naviagte the challenges that can often see businesses fail. You can learn more about the network and how Connectd could support your startup's growth journey here.

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