My biggest business failure was in 1999, and once you’re finished reading, you’ll understand why startups fail.
Things were going well with the telecom business that I started in 1991. We were in our 5th year of business, and in 1996, I decided to get into the telecom software business. The company was called Response Interactive. (I managed to find a screenshot of the website from waybackmachine.com.)
I hired a software developer, and within six months we had a prototype. Within the first year we had our first two beta sites installed.
Although the software was well written and technically worked, I had a tough time operating the software business and the telecom company at the same time.
By late 1999, I recognized that if I didn’t focus on one of the businesses, they were both going to fail. The software business wasn’t profitable, but fortunately the telecom company was, so I made the difficult decision to close the software company.
Although I tried selling the software division of the company to another firm and was close to getting my asking price, I wasn’t able to do a deal in the end.
As a complete aside, and unrelated to this blog post, the company I was going to sell the software division to offered me a no-cash offer in exchange for 10% of their company. I didn’t accept their offer and waited for another offer, which unfortunately never arrived. Four years later, the company that offered me 10% of their business sold for almost $100 million. This means that I would have walked away with $10 million. Instead, I lost $200,000 on the software and moved on.
Although Response Interactive was technically part of the larger telecom company, it was, in effect, its own stand-alone business. The reason it failed was because I didn’t have the right team in place (which is number 3 on the list of the top 12 reasons why businesses fail). I wasn’t able to hire or retain the top software developers.
It’s sobering to know that up to 90% of startups fail. Having gone through my own business failure, it’s easy to see how a lack of planning, or cash, could be the reasons.
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It’s not necessarily from lack of hard work though. In fact, most entrepreneurs work an average of 63% more hours per week than the traditional non-entrepreneurial worker. Not working hard enough wasn’t even in the top 12 reasons why startups and early-stage companies fail.
So what steps do you need to take to make sure that your business isn’t one of the business casualties? Let’s review the top 3 reasons why startups fail:
Why Startups Fail – The Top 3 reasons
No Market Need
No matter how good of a salesperson you might be, and no matter how amazing your marketing is, if you’re trying to sell air conditioners to people who live in the Arctic, you’re going to have a tough time finding sales.
It’s important that you do some market research before, not after, you start your business.
It’s going to take hundreds, if not thousands, of hours to launch your business. It’s going to cost thousands of dollars to start your business.
Doesn’t it make sense to do some market research to assess the market demand and competition?
Who are your competitors? How are they marketing? How many competitors do you have? What kind of margin will you make? Is the product a fad, or has it been around for a long time?
You need to speak with prospective customers to determine the market demand for your product. Whatever widget you’re selling, purchase some, show them to your family and friends, and see what they think. One important caveat is that your family and friends might not be completely honest with you, so you have to use their feedback cautiously.
Preferably, you can also do some one-on-one interviews with people you don’t know to get their honest feedback.
Do they like your product? What would they pay? Once they’ve bought your product, will they need to refill, or is it a one-and-done type of product?
Although I haven’t done this myself, so I can’t speak from experience, you can run a test with some Facebook ad campaigns. Start your test with a couple hundred dollars, and send the traffic to a purpose-built landing page. See if you’re able to garner any hits to the page. Once they hit your page, you can ask them for some feedback in exchange for a $5 gift card, or 30% off your product should you decide to launch.
Ran Out of Cash
There are many reasons why a company could run out of cash, and I suspect that running out of money is the end result of the other 11 reasons on the list.
Let me explain.
Reason number one for going out of business is because there’s no market need. We covered that above. When there’s no market need, you have a tough time selling products, which in effect, means you ultimately run out of cash.
If you have poor products, which is number six on the list, people won’t buy or repeat-buy your product, which means you have fewer sales than expected. When that happens … guess what? You run out of cash.
Companies could run out of cash because of poor cash flow management. It’s rather unfortunate that many business owners—even those who should be making a reasonable profit—don’t, because they spend like drunken sailors.
Ultimately, I suspect that running out of cash is the symptom, not the cause.
Not the Right Team
Focus on Your Strengths and Delegate Your Weaknesses
What are your strengths?
If it’s marketing, focus on that, and hire for sales and admin.
For any aspect of the job that you’re not amazing at, hire people who can do it better than you’re currently doing. Train these people. Manage them. Motivate them. Treat them like gold.
Now repeat that process. Over and over and over again.
Start building a team of competent people around you who are experts in their respective fields, and who you want to learn from. You don’t need to know more than they know. You just need to make sure that they’re motivated, want to learn, and love coming to work every day. Now lead them, and get out of their way.
Building a strong team is one of the biggest challenges in business. Before you even begin, you need to understand the role you play in the business and where your strengths and weaknesses are. Admitting your weakness is often a more difficult task then you’d think, which I’m still working on every day. I’m learning new ideas from books and podcasts, trying to understand my strengths—what I love, what I want to be doing more of, and (conversely) what I want to be doing less of.
As you can see from the chart below, the cost of a bad hire for a small business is huge. In fact, the chart suggests that over 50% of small business owners have hired a candidate who was not as qualified as they would have liked. I understand the temptation to rush to hire and fill the role, and I admit to doing it myself, but it’s better to do as the saying, “hire slow and fire fast.”
If you are still in the early stages of starting your business, you must have a business plan before you start—not after.
Having a plan isn’t about predicting the future, but rather, it’s about having the discipline to think through all the necessary steps required between your first day in business and your next few years.
I know you have a great idea, but will people buy what you’re selling?
Let me ask this another way.
How do you know people will buy what you’re selling?
And how many widgets do you need to sell to break even?
Preparing a business plan isn’t just about producing a document that you’ll need to give to a lender. It’s about thinking through your idea and setting goals.
I understand the temptation to rush to get things started, but it’s more important to be prudent, do your homework and due diligence, understand your market, and marketing, and only then launch.
Good luck, and hopefully, now that you’re armed with the above information on why startups fail, your company won’t become a victim!
Incidentally, if you’re running a growing business, and want to better understand how to expand your business through acquisition, you might enjoy this blog post: How to Expand Your Business Through Acquisition and Make a Killing
Want to know more about me and read some of the other interesting small business growth, profit and wealth stories I’ve written.
Here’s one of the first articles I wrote: My Journey Post Business Sale as I Sail Into a New Harbour.
Are you a younger entrepreneur? Here’s another interesting article I wrote:
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Jeff Wiener aka The Wealthy Wiener