No one goes into business expecting to fail, yet a good number of new startups do. In an effort to understand what causes failures, CB Insights waded through the data surrounding 101 failed businesses, and compiled a list of the top 20 reasons that startups fail [PDF]. Here are the top five, along with tips on how to keep these issues from damaging — or even tanking — your business.
Reason #1: No Market Need
Forty-two percent of the former business owners CB Insights surveyed believe they failed because rather than trying to fill a market need, they concentrated instead on creating a solution for a problem that didn’t exist. One respondent summed it up by saying, “Startups fail when they are not solving a market problem.” In other words, it’s not enough to create solutions to problems. You have to ensure that enough people are willing to pay for those solutions to support a business. Avoid this trap by understanding your potential market and what those customers want. Here’s how to do this inexpensively:
- Use the Small Business Association’s SizeUp tool. It will allow you to analyze your competition and locate potential customers. Once you have this information, ask yourself what you have to offer that’s different and why customers should buy from you rather than the competition.
- Conduct a survey. Sites like SurveyMonkey have made it easy (and free) for small-business owners to take the pulse of the public about their products and services.
- Organize a focus group. Convening one will be more expensive if you hire an expert to do it. You can do it for less by organizing it yourself[PDF].
Reason #2: Not Enough Cash
Businesses run on cash, and in the report, 29 percent of the startup entrepreneurs cite running out of cash as the reason for their business failure. A common problem is not being able to raise additional funding needed to stay in business. To prevent this from happening to you, take the following steps:
- Perform a break-even analysis. By running this report, you’ll be able to predict when the business will become profitable.
- Create a budget. By creating a month-to-month budget, you’ll know exactly how much capital you’ll need to get to the point where the business pays for itself.
- Create a relationship with a lender. Whether it’s a loan officer at your local bank or an alternative lender, if you establish a relationship when things are good, your lender will be more likely to help if you find yourself in need of a quick cash influx.
- Stay on top of your cash flow. You should know the financial health of your business at all times, so if something begins to falter, you can catch it before it’s too late. Creating a cash flow statement is the first step.
Reason #3: Not the Right Team
The team behind the product or service can mean the difference between success and failure. Twenty-three percent of survey respondents cite not having the right team as what caused their businesses to fail. Some blamed a lack of understanding of critical matters by those in charge, while others thought that if they had someone to provide checks and balances for them when making important decisions, they would have fared better. Here’s how to make sure you have the right team:
- Find a mentor. Get in touch with SCORE mentors, with whom you can communicate in person or online. In addition, the SBA offers a list of other organizations that provide business mentors.
- Outsource what you can’t do. If there are areas that you aren’t good at or are unqualified to do, rely on others’ expertise by bringing in independent contractors or consultants to do the work.
Reason #4: Ignoring the Competition
Nineteen percent of those who went out of business report that the competition did things better than they did, leading to their demise.
One respondent says that, despite doing other things well, their product was more difficult to use than the competition’s, which caused them to fail. Avoid falling into this trap by researching your competition. You can hire a consultant or do it yourself by watching your competitors’ website, following them on social media, signing up for their mailing lists, anonymously shopping at their stores, and using their products. Then figure out what they do better and determine how to change that.
Reason #5: Pricing/Cost Issues
Nineteen percent of the failed business owners also say they couldn’t determine the ideal price/cost point that would provide them with sufficient profit and give customers value for their money.
To arrive at your perfect price point, you should first determine your market profitability. This will help you determine how much business you’ll need in order to remain profitable at various price points. Then, compare those price points to your competition’s to determine whether the market will bear your price. And remember: if you plan to price your product higher than the competition’s, you’ll have to offer something consumers perceive as more valuable.