No one starts a business to see it fail.
Seeds of ideas slowly germinate into full-blown business plans bursting forth with sparkle and optimism. This business is your dream and you’ve given it your heart and soul. You know it won’t fail.
I’m sorry to say that many startups do fail, and they fail for various reasons.
Cash is the lifeblood of a new business. Without it, you can’t afford to pay your employees, purchase inventory and materials, or adequately market your business. You can’t even cover your overhead expenses like rent and utilities.
The reasons for cash deficits are many and generally include:
- Sales revenue is lower than expected
- Material costs are higher than expected
- Unanticipated expenses like equipment failures or rent increases
- Credit lines are maxed out
- Interruptions in your supply chain
- A downward turn in the economy
Another reason for cash shortages comes from simply misreading early business success.
Think about it, rapid success breeds confidence and it fosters the belief good fortune will continue. Caution is no longer necessary.
As a result, you might decide to open another location, hire more employees, or expand production. Remember, rapid expansion creates a rapid increase in overhead costs such as rent, payroll, and materials.
Even during good times, operating cash can be severely stretched. But if the good times don’t last, operating cash can all but disappear.
The moral here is to guard your cash like the critical element it is.
Lack of Demand
This one seems obvious. Why create a business selling a product or service nobody wants? You wouldn’t open a typewriter repair service today and expect success. Yet, similar things happen.
Entrepreneurs can get caught up in their dreams without thoroughly researching the market and vetting their business ideas. They start their business based on emotion and wishful thinking rather than a determination of what their prospective customer wants or needs.
They love their vision and genuinely believe everyone else will too. They’re emotionally involved and see a “need” where none exists.
Before launching a new business, the entrepreneur must do a cold-blooded objective analysis of the market for his product. This must be done before committing time, effort, and money to a venture that doesn’t stand a chance of success.
You can’t start a new business without accepting the fact there will nearly always be someone else selling the same product or service as you. If your doors are open, you will have competition for the same target audience.
Businesses compete in many ways including quality of services, product quality or availability, price, and customer service. You must be strong in multiple areas or be exceptional in a few to be successful.
The local hardware store can’t compete with the big box retailer on price, but it can excel by providing better service and a friendlier, more knowledgeable sales staff.
It may require opening earlier, staying open later, or employing a higher quality of staff. Making the extra effort to serve the customer will result in outpacing the competition.
To truly be successful, the startup business owner must adopt the attitude he will do whatever it takes to successfully compete with his rivals.
Regulatory or Legal Challenges
One of the loudest complaints voiced by business owners involves the number of legal rules and regulations they are forced to comply with to operate.
They see the “red tape” as unnecessary interference in their business. However, failure to follow regulations can have severe consequences.
It could be the local town diner that fails its health inspection and must shut down until corrections are completed. Or possibly the local septic tank service company is found to be illegally disposing of its waste products. As a result, the owner loses his license to conduct business. Or worse, a home builder spent millions developing a property only to discover he didn’t obtain the proper permits so he can proceed with the project.
The lesson here is to always be aware of all local, state, and federal regulations that apply to your startup. Failure to follow them could be financially catastrophic.
Pricing or Cost Issues
The inability to control pricing and cost issues is another major cause of business failure. If the owner doesn’t get the best possible cost for raw materials, he leaves money on the table. Similarly, he needs to sell his own product at the best price without losing customers.
More and more suppliers give advance notice regarding upcoming cost increases. You must use this information to adjust your own pricing down the road.
If you need a certain profit percentage from sales to stay afloat, you must constantly be aware of how price and cost fluctuations impact the success of your business.
This is a tough one. You can have the right product at the right price at the right time, but your business can still fail if you don’t have the right people in place to execute.
Your team is just that, a team. Regardless of personality quirks, everyone must mesh to make things work. And we all know, this is easier said than done.
It’s up to you, as the business owner, to hire and develop employees who can get along and keep the business’s best interests at heart.
Simply put, bad employees are bad for business. You must assemble a team that shares your values to keep the company moving forward.
This is another tough one because sometimes mistiming can simply be due to bad luck.
In the mid-90s, the home computer industry was still in its infancy. Opening a small retail computer store seemed like a promising idea because interest was growing, and profit margins were good. But overnight, consumer demand skyrocketed, and computers moved from a luxury purchase to just another commodity. Every big box retailer started selling them and profit margins vanished. And, as a result, so did the small computer stores.
Bad luck or failure to analyze the market? Or a little of both?
You can’t control luck, but you can closely follow your market to determine if it’s due for an adjustment.
Sadly, there will always be a market for poor-quality goods and services. Inferior quality usually requires a lower selling price, and this alone will attract certain buyers.
In the short term, the buyer may be excited thinking he’s found a bargain and saved money. However, as time passes, he’ll learn the truth about poor quality goods through breakdowns, higher production costs, and shortened product life. He’ll painfully be reminded of the adage, “you get what you pay for.”
So, even though such products are sold every day, I advise against using them as your business model. Especially if you intend to be around for a while.
Startup businesses depend on word-of-mouth advertising to get established. If you only offer poor quality, word will spread like wildfire and your business could be destroyed before you know it.
Disharmony Among Investors
We previously discussed how friction between team members can harm a startup’s chances for success.
However, if your startup has investors, it creates a separate set of problems.
Because of their financial contributions, investors might expect to have a say in how your business is run. The more they’ve invested, the greater the amount of expected input.
If you’re all on the same page, that might be acceptable. However, they could also suggest (demand) the business move in a direction contrary to your desires. Or get involved in day-to-day operations. At best, the resulting pressure could make you miserable and, at worst, harm your company.
There are advantages to working with investors but think carefully before doing so.
The ability to make nimble and timely adjustments based on market conditions is essential for startups. That said, adjustments need to be made thoughtfully, and not as a knee-jerk response.
If the pivot does go badly, you can either give it time to work or consider another adjustment. But this second correction needs equal care. Compounding one wrong decision with another can be disastrous.
When a business pivot goes bad, decisive, and thoughtful action is required to save your business.
We all experience some degree of burnout in our careers. But if you’re a business owner, neither you nor your startup can afford an extended stay.
Remember, if you have employees, they take their cues from you. They watch and if you exhibit signs of burnout, don’t be surprised if they mimic the same behavior. Decision making ability, productivity, and overall company culture can suffer. If you don’t seem to care, no one else will either.
Take a break, recharge, but come back strong for the sake of yourself and your business.
Lack of Passion
To me, a lack of passion is one of the more serious situations an entrepreneur can face.
This business is your baby. It’s what you dreamed of doing. But if you truly can’t produce the passion needed to go all in, you must have a serious conversation with yourself. The answers you get can determine the success or failure of your business.
Learn From the Mistakes of Others
I don’t want you to think I’m trying to discourage you from starting your own business. Far from it. I’m only alerting you to potential hazards you may encounter along the way.
Remember, forewarned is forearmed.