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Top 5 Reasons Startups Fail and How to Avoid Them

Startups and small businesses are at the cornerstone of the American Dream. Google, Apple, Facebook — every Fortune 500 company you can think of was once a startup or a small businesses before they were capital giants, and for each successful business you can think of, there are many, many others that failed in their stead.

While the myth pervades that a large amount of small businesses fail in their first year, reports that the long-term outlook substantiates fear of failure; 96 percent of businesses fail in their first ten years, according to them. The U.S. Bureau of Labor Statistics supports this narrative as well, though their graphs are a little different:

The point is that whether in the first year or ten years down the road, a major number of small businesses and startups will fail. The good news is that a recent CB Insights analysis of over 101 startup failure post-mortems has revealed the top 20 reasons that startups fail.

If you look at the report itself, you’ll notice that the sum of the percentages far exceeds 100 percent, but that’s because a lot of startups fail for more than one reason. Below you’ll find the five reasons that give startups and small businesses the most trouble — and how to avoid falling victim to them yourself.

5. Pricing/Cost Issues

CB Insights calls pricing a “dark art” in their reports, stating that the problems lie in making sure a product is not priced “too high or too low to make money in context of the particular costs of a company.” While CB Insights might be cut and dry on the issue, Caron Beesley, writing for the U.S. Small Business Administration blog, offers six points to make sure you’re pricing small business products and services correctly:

  • Understand service costs and impact on pricing. Too many small service firms fail to analyze total cost and overhead, thus failing to price profitably.
  • Know what your competitors are charging. Unless you’re somehow able to drastically outperform your competitors, your prices will probably similar to theirs.
  • Take advantage of front-end, back-end, and/or tiered pricing. This is a common tactic. Think price of goods or services (front-end) plus additional services that can add-on (back-end, like insurance or accessories). Together this is tiered pricing.
  • Understand conversions and metrics. Always be open to doing things differently to increase conversions — this includes discounted pricing.
  • Price higher than you think you would. Not charging enough is a common problem small businesses have.

4. Get Outcompeted

We all know how this goes — a company comes up with a good idea, and then all of a sudden ten other companies that look just like the original pop up, peddling the same services under different company names. In the end, one or two of these organizations ends up being the dominant provider in this new market, and it isn’t always the one that started with the idea in the first place.

“While obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 19% of the startup failures,” says the CB Insights report. If we can glean anything from the report, it’s essentially that startups can’t rest easy thinking they know or own anything. Stay competitive, and always be looking for advantages over your competitors.

3. Not the Right Team

When it comes to selecting the right team, even successful companies like Uber are still trying to figure everything out. With Travis Kalanick’s resignation as CEO, amidst allegations that the company harbored a wildly sexist and offensive culture toward women, it’s obvious that even multimillion dollar startups are not immune to the problems disharmony and dysfunctions of a team. CB Insights looks to Standouts Jobs and its post-mortem to present a decent example:

“…The founding team couldn’t build an MVP on its own. That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t.”

Never underestimate the value of a good team, because a lack of one sinks over 23 percent of small business startups.

2. Ran Out of Cash

A whopping 29 percent of small business startup failure stems from cash flow problems, whether that be in managing the money coming in, going out, or both. Financial writer Heather Jennings’s number one piece of advice for increasing cash flow is to create a cash-flow forecast. This means first drawing up a list of payments your business needs to make over the next year, including wages, rent, loans, taxes, etc. Then, you make a list of money coming into the business, which includes customer payments, and tax returns. After all that, you subtract outgoings from ingoings to see how much money you have for the month — it sounds obvious, but some forget that while, yes, you may have increased numbers of sales in December, you’ll also need more salespeople to execute these sales.

CB Insights essentially makes the argument that startups don’t always run out of cash just because they’re underfunded. Plenty of startups have great funding, but opt to spend their money on foolish things or in fiscally irresponsible ways.  Some are simply unaware or ignorant of small business tax laws. Make sure that you’re always evaluating your cash flow, even if you think you have more than enough.

1. No Market Need

CB Insights states that “tackling problems that are interesting to solve rather than those that serve a market need was cited as the number one reason for failure in a notable 42 percent of cases.”

In the post-mortems, it’s noted that one company which offered office efficiency solutions for doctors realized that they simply weren’t appealing to their customer base. “Doctors want more patients, not an efficient office,” wrote Patient Communicator.

Of course, sometimes it’s hard to tell if people will want what you’re offering when nobody else is offering your solution. Perhaps that’s why almost half of all small business startups fail as a result of building a solution looking for a problem.

There are plenty more reasons that startups fail, but these ones are by and far the largest. While nobody can guarantee that a small business will succeed by avoiding these pain points, it’s certainly a good place to start.

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