The top 5 reasons most new startups fail

About 95% of all startups fail within their first 1-2 years. Think about that for a second... only 5 out of every 100 new startup enterprises lasts beyond 2 years! That equates to a lot of wasted time, money and resources. So why is it then that most startups fail?

Let's first consider the nature of a startup compared to a a more traditional business model. Essentially a startup is an entrepreneurial venture for an innovation that fills a void or improves upon something else already available in the marketplace. By its very nature a startup is often riskier than a more traditional business model and herein lies many of the problems.

Here are the the top 5 reasons most startups fail and what you can do to avoid them.

1. Not doing a feasibility study

This is probably the biggest reason most startups fail. Let's face it, when many of us get an idea it becomes part of us. We often get so excited and believe in it so much that we don't even stop to do the maths or logistics of how it will work. If you are like this, STOP! Without knowing what you are up against, how much it will cost, your potential market, your competition etc. you are basically just stabbing in the dark.

There is absolutely no point spending a cent without first doing a feasibility study to ascertain if your venture is feasible. If there are core issues from the get-go that you don't know about or plan for, you will simply be wasting your time and money the further you go in. A professional feasibility report created by industry experts will give you the right information from the start. It will ascertain if there is potential to make money from the venture and identify if there are things you need to change to make it successful ongoing.

2. Running out of funds

Before you you begin a new startup venture you need to cost out what is required to deliver it and plan for any speed-humps. Many startups fail to properly account for this and just dive head first into the investor or crowd funding markets. There often comes a time in the development that the venture runs out of cash and the machine stops moving forward. When this happens the venture will hit a wall and worst case scenario you risk bankruptcy if you have staff, bills, overheads etc. that you are contractually obliged to keep paying for.

Before you think about how you will fund your startup, you need to ask questions like...

"Is there room in my business plan to pay an investor/s their agreed reimbursement for injecting funds"
"Have I accounted for every single thing that will be needed to deliver the innovation to market in my funding goal?"
"If my projections blowout am I able to draw upon reserve funding or liquidity to keep the venture moving?"

"Are the investors and funds legally accounted for? Will there be any grey areas later or disparity with the roles or influence of those vested financially?"

3. Internal conflict between those involved

As many startups progress cracks may begin to appear in the relationships between those involved. Things like people not fulfilling their obligations, financial confusions, not agreeing on important decisions etc. all cause tension. Unfortunately this tension often escalates into a situation that is not rectified and the organisation will fall apart.

So how do you avoid this? From the start you need to draw up strict guidelines that govern the roles of those involved and put in place a conflict resolution plan in case something happens. By doing this everyone clearly knows what is expected of them and there is a constructive process which any disagreements can be sorted out through. You need to account for things like:

- Roles and expectations (workload, duties, involvement)
- The ultimate goal/s of the operation
- Financial obligation, reward and management
- Decision making processes & governance
- Conflict resolution & mediation processes
- A clear exit strategy

Clearly documenting these right at the start (even if you are going into business with your lifelong friend or family member) is paramount to safeguarding future conflicts and promoting a healthy business relationship for those involved.

4. Trying to do everything your self

A common denominator amongst startup owners is that they try to do everything themselves. They take on too many responsibilities and ultimately stunt the growth of the venture or overlook important components. There are so many different aspects required to getting an innovation off the ground. Account for these in your initial budget and delegate the funds to industry professionals to not only save your time but to also ensure they are done right and everything is accounted for. Let's face it, startup owners wear many hats, especially in the early days. The fact of the matter is you can't be the owner, accountant, product developer, lawyer, business planner, designer, salesperson etc. all at once, so try to limit your involvement to what you are best at and what your time is most effectively spent doing. Otherwise you will be working 24 7 and that is not healthy for you or your business and is certainly a big reason why many startups fail.

5. Growing too big too quickly

In any business change management is key. If change happens too quickly and you don't properly plan or account for it then issues can arise. The nature of many startups is that they develop very quickly. The key is to make sure at each stage of your development you have everything in place to handle the next level. This applies to available funds, having the right people, the ability to fulfill orders, customer service, operations management etc.

There is also the commonly repeated theme amongst many startups of overcommitting their funds. When you initially get funding or the revenue from your project begins to come in it is easy to spend money on things you don't necessarily need. Here it is important to stick to your original business plan and only spend funds on the crucial things. Maybe ask your self twice if you really need that brand new inner-city office before you commit to a 12 month lease?

The juxtaposition of growing too quickly is that there is often a lot of money coming in. Without being to handle the changes unfortunately it can also lend itself to accumulating losses just as quickly. Even if your primary goal is to develop your venture as quick as possible and sell it off, it is always important to grow in stages that you, your team and your funds can handle. Doing otherwise opens the door to many problems and can ultimately be the downfall of your operation.

Planning is key!

The common denominator with all of these reasons is that they can all be avoided or minimised with proper planning. Taking the time and getting the right people to help with this can save a lot of headaches later and ultimately help make your startup more successful. Most importantly if there are flaws in your innovation these will be identified from the get-go before you waste your time and money.

If you have an innovation or startup, you may be interested in working with us to assist during this stage. For more details on our services please click here.