According to the U.S. Bureau of Labor Statistics, approximately 20% of small businesses fail in their first year, and only 25% of new companies make it to 15 years or more.
Of the 100 businesses that set up shop today, only 25 would survive after 15 years. That’s a whopping 75% failure rate for small businesses in the United States.
Well, none of these statistics is meant to discourage you. Use them as a motivation to prepare for your business success.
But the question is, why do small businesses fail? It’s often because of simple mistakes. So it’s best to learn from other business owners’ mistakes to help you save time, energy, and resources.
Well, we did some research and studied a bunch of startups to create this list of common 11 reasons for startup failure.
Let’s dive right in.
11 common reasons why startups fail
There might be many reasons that can lead to a business failure. While we can’t control and understand every aspect regulating the failure, these are some common reasons identified behind the failure of many popular startups.
1. Starting for the wrong reasons
The simplest definition of business is problem-solving.
However, social media often portrays entrepreneurship as glamorous and exciting. (Read: Elon Musk). Employees in 9-5 jobs dream of quitting and starting their own businesses.
Nothing wrong with it. But starting a business just because you’re dissatisfied with your job is not advisable.
Running a business is more than just launching a product. It involves approaching prospects, marketing, product/service fulfillment, customer success, and customer service. One even needs to ensure that their team is functioning effectively.
In a nutshell, every day is about problem-solving and making sure that solutions are executed for maximum output.
When you focus on solving real problems, earning money becomes a by-product. So, if you’re not passionate about solving problems daily, your business is likely to fail.
Ventures must solve real-life problems as the inability to do so becomes a primary reason why a small business fails. Solve a problem you’re passionate about and have faced yourself.
2. Lack of market need
Okay, so you’re clear about the problem you’re solving—congratulations. You have cleared the first hurdle.
But now comes the next crucial part–ensuring that there exists an identifiable group of people facing that same problem.
For example–during the COVID-19 pandemic, people around the globe required face masks. So, mask manufacturers sprung up in quick numbers to fulfill that need. Similarly, your solution should solve a ‘real-life need.’
Also, your solution (product/service) should be easy to deliver to groups of people needing that solution.
Alex Hormozi, in his book–“$100M Offers” suggests finding a market to cater to while keeping the following factors in mind:
- Your customers should be easy to reach and target.
- Your customers are willing to spend money to solve their problems.
- The number of customers and problems they are facing are growing.
- Customers are experiencing problems with the current solution.
It’s also valuable to be part of the group you’re solving problems for. This helps you better understand their pain points, desires, and worries, making it easier to build relevant solutions.
Example: Quibi, a video streaming service, failed spectacularly because it misjudged the market’s need. Despite raising $1.75 billion, it launched in 2020 without understanding that users didn’t want a separate service for short-form content, especially when platforms like YouTube and TikTok already filled that need.
3. Inefficient planning
A successful business doesn’t happen by accident. It requires intricate planning and impeccable execution. It requires well-thought-out action steps that must be executed consistently on a day-to-day basis. Yes, you may be required to iterate occasionally, but you need to plan well to achieve your target.
Before you begin planning, a lot of variables need to be considered.
It includes:
- Your business vision and objectives
- Your revenue model
- Market analysis and competitor analysis
- Potential problems and solutions
- Financial – capital investment, balance sheet, financial forecast, and budgeting
- Marketing and advertising, etc
You could also refer to this comprehensive article by our team to learn how to write a business plan. Additionally, you could use the free business plan examples included in the article to get started with your plan.
Example: Jawbone, a consumer electronics company, is a prime example of inefficient planning. Despite its innovative products, Jawbone failed due to poor financial planning and an inability to adapt to market changes. The company burned through $1 billion in venture funding before shutting down in 2017.
4. Capital mismanagement
Rich Dad Poor Dad, best-selling author – Robert Kiyosaki; In his book; explains the importance of cash flow. Cash flow is the amount of money entering and leaving your business over a given period.
It’s vital since it helps your current expenditures and plans for the future.
A small business should, therefore, always have a positive cash flow.
It helps the business function smoothly since all expenditures are taken care of. Expenses include real estate rent, salaries, and production costs.
It should be understood that businesses with positive cash flow can spend more to improve their product and market themselves better. The business should price its product/service by keeping its expenses in mind. Pricing should be kept in mind expenses, time, and resources. Learn more about our guide on pricing strategies.
The best way forward for small businesses is to track their daily Profit and Loss. As a business owner, this will inform you about your daily cash flow.
Example: WeWork became infamous for its capital mismanagement, despite raising billions of dollars. The company spent heavily on office space, extravagant expansions, and marketing without a clear path to profitability. This overspending and the lack of financial discipline led to a drastic downscaling of the business and the eventual ousting of its CEO.
5. Making decisions based on gut
Do you know what successful businesses like Amazon, Walmart, and Ikea have in common?
Think about it.
Okay, try one more time…
The answer is objective, data-driven decision-making.
As entrepreneurs and business owners, we believe that our solution is the best. We live so much ‘in our heads’ that we overlook real-world data. But reality often differs from our perceptions.
According to some studies, more than half of American business owners rely on their “gut” to make business decisions.
However, the companies mentioned above focus on making objective decisions based on data. They study their analytics and collect data to make accurate decisions. It also helps them decide on a future course of action while keeping in mind past mistakes.
According to an article published in Harvard Business Review – collecting and analyzing data gives a competitive advantage to your business. It helps offer better solutions that, in return, attract more customers and eventually marginalize your competitors.
6. Inefficient marketing
Imagine you researched your target customers, built a solution to solve your customer’s pain point, crafted a thorough business plan, learned how to manage business cash flow, and have been tracking your data to the T.
But, your business isn’t growing. There’s revenue coming in, but not in the volumes you want.
If you can relate to this situation, it probably means your business needs marketing.
Marketing means promoting and selling products or services to solve your customer’s problems. It’s one of the most common reasons why businesses fail.
Companies like–Apple, Nike, McDonald’s, and Mercedes are legends in their market because of their marketing.
After the COVID-19 pandemic, small businesses have realized the importance of marketing, especially digital marketing. Small businesses had pivoted to a digital-first approach to keep themselves afloat during the pandemic.
This step-by-step guide written by the Upmetrics team can help you strategically plan your marketing efforts.
7. Ignoring customer feedback
Collecting and analyzing feedback helps small business owners understand if their product/service is helping solve their customer’s problems.
Collecting feedback and iterating on your business’s offer helps build competitive differentiation. It enables you to stand out easily in a saturated market and show that you genuinely care about your customers.
Some critical feedback sources are
- Your database. Call and talk to your customers. Get feedback and iterate. This is why it’s essential to collect and analyze your data.
- Google reviews
- Social media reviews
- Online review communities like – Trustpilot
- Local business information aggregators like – Yelp and TripAdvisor.
8. Unsustainable expansion
Small businesses often commit the blunder of rapid expansion once they show signs of growth. Instead of investing in improving their present offer, businesses often expand their product line or start developing their stores.
Theoretically, more stores and products/services should lead to more sales. But it’s farther from the truth.
Not only does it lead to a drain of finances, but it also dilutes the customer’s experience. Small businesses should stick to their business plan and avoid unnecessary expenditures.
Example: Starbucks faced significant challenges due to overexpansion in the early 2000s. The company opened too many stores too quickly, which led to a decline in the quality of customer service and overall experience. By 2008, Starbucks had to close around 600 underperforming stores in the U.S. due to financial strain and an overextended business model.
9. Poor risk management
Many small business owners watch their business fail because they don’t have contingency plans in place to deal with unexpected challenges, such as economic downturns, natural disasters, or sudden changes in market demand.
Most small businesses that fail to anticipate risks are often blindsided by them, leading to financial strain and even closure.
Example: Lehman Brothers, one of the largest financial institutions, collapsed in 2008 due to poor risk management. The firm heavily invested in subprime mortgages without adequately assessing the risks associated with the housing market bubble. When the housing market crashed, Lehman Brothers was left holding billions of dollars in worthless assets, which led to its bankruptcy and contributed to the global financial crisis.
10. Failure to pivot
One of the major reasons for business failure is their inability to change.
Sure you had a great business idea and it performed well. However, the market changes and so do customer expectations and needs.
If you choose to ignore the market shifts, the business is going to suffer.
Successful businesses are those that recognize when their current business model is no longer sustainable and have the foresight to make changes before it’s too late. Stubbornly sticking to the original plan, even when it’s not working, can lead to missed opportunities, unexpected expenses, and ultimately, failure.
Example: Kodak, once a leader in the photography industry, failed due to poor risk management. Despite inventing the first digital camera in 1975, Kodak feared it would cannibalize its lucrative film business. The company delayed its transition to digital photography, allowing competitors to dominate the digital space. Kodak’s failure to manage the risk of technological disruption and adapt to changing consumer preferences eventually led to its bankruptcy in 2012.
11. Inefficient team
Often, small owners hire the cheapest or most readily available talent to run their business operations. But that’s not the wisest decision. Mismatch in skills and experience can reduce your productivity and efficiency.
Choose employees based on the results and experience they can bring to your business, not because they are your friends or demand a cheaper salary.
Those are pretty much all the reasons that may cause business failure.
Build a successful venture with Upmetrics
A successful small business doesn’t just happen on its own.
It requires thorough planning, a clear vision, and a strategic approach to turn your ideas into reality.
A detailed business plan outlining your market, competition, financials, and business strategies serves as a roadmap to realize your objectives. It lays the foundation for decision-making and helps you stay focused on your goals.
By addressing potential challenges and setting a clear path forward, effective business planning not only minimizes risks but also maximizes your chances of long-term success.
Now, don’t procrastinate writing a business plan. With the Upmetrics business planning app, you can create a solid business plan in no time. Its guided approach, AI functionalities, and end-to-end planning resources make it easy, even for first-time planners.
Get started now.
