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Top 10 reasons small businesses fail – and what you can do about it!

Building a startup begins with a dream or vision about taking something you’re passionate about and turning it into a business. You hope that the result will change the world and give you some financial freedom along the way. The chance to be your own boss is a nice appeal as well. There are lots of good reasons to try a startup, and the time has never been better.

But the picture is not all rosy. The path to startup success is fraught with lots of challenges. An oft-repeated stat has it that 8 out of 10 people who start new businesses fail within the first 18 months. That’s a crash and burn rate of 80%. Or stated slightly different, a new business owner has a 1 in 5 chance to survive past the first year and a half.




Obviously, no one likes to fail, especially a newbie entrepreneur who is investing lots of cash to turn that great business idea into gold. But there are a number of reasons why startups and small businesses tend to flame out in the first year or two. So let’s run through the 10 biggest ones.

Then, not to leave you in the lurch, we also include where relevant some brief practical tips that, if adopted, can put your startup onto the path of success.

1. No unique value proposition

More and more folks are trying startups and some even have argued why everyone will eventually need to become an entrepreneur. The point here is that so many folks are entering this arena and the competition is fierce. So you need to ask yourself: “Does your XYZ widget really do anything different than ABC’s widget?” Customers are the final arbiters and will tell you what they really think.

Solution: Go Lean all the way. The Lean Startup strategy has emerged in recent years as a refreshing alternative to building new business ventures. Rather than a big elaborate business plan, which predisposes you to follow a strategy that nobody may buy into, you introduce a minimum viable product to the market – whether it’s a simple landing page, an email, or a few lines of code – and then pivot and make adjustments based on the feedback of your early adopters. Make sure you monitor your results right from the start. In the world of digital exposure it is critical to be constantly aware of your market foot print on the web and how your customers see you. If your website is too slow you lose customers and opportunities. If your website isn’t fast and user friendly across all platforms and all mobiles then you have undermined your chances right from the start. The solution is easy though – monitor your web and IT with Paid Monitor. It is fast and easy to set up, has a dashboard you will easily understand and will let you know exactly what your customers experience with it’s real user monitoring (RUM). So before you even launch your new business and toast your anticipated fortunes make sure you sign up for the free trial and see everything you need to know.

2. Not tracking your expenses

Uncontrolled spending and poor money management are among the biggest problems for new businesses. Startup owners mistakenly assume that if you build it they will come, and justify their expenses on the belief that the product release will bring in all kinds of sales. But there are no guarantees that customers will buy your product. Not knowing where the money is going is just setting the stage for an epic fail.

Solution: A major key to a successful startup is controlling finances. And one way to do this is through bootstrapping, or paying your own way by stretching resources as much as possible. This should be your first option for funding if at all possible.

3. Insufficient capital

One of the biggest reasons for startup failures is that new entrepreneurs invariably underestimate the high costs that will be required to implement their business vision. Along with this, they will also overestimate the amount of projected sales. This double-whammy leads many new businesses to close their doors before they’ve even started. Entrepreneurs must plan for initial startup costs as well as the critical first two years of operating expenses.

4. Focusing on non-essentials

Startups are notorious at spending money on incidentals that ultimately don’t contribute to the financial prosperity of the business. Paying too much for rent, labor, and materials is a sure sign of trouble especially if you don’t have secure cash flow. Other seemingly legitimate expenses can also become a big money pit if you’re not careful. Building a big trendy website, hiring an attorney to trademark your brand, or incorporating your new business are all expenses that can be deferred, since they are not helping you build revenue.

Solution: Avoid paying for non-essentials that don’t really add to your value proposition out of the gate. Go virtual as much as you can. For instance, by hiring through oDesk-Elance you support the global economy and save money by avoiding local, overpriced labor rates.




5. Failure at the top

Startup owners can be their own worst enemy. Founder dysfunctionality at the top can lead to systemic failures across the business. Stubbornness, risk and conflict averse behavior, greed or insecurity are all attributes that won’t bode well for new organizations.

6. Failure to communicate

So you happen to have a really cool idea that you think will change the world! That’s well and good but most new entrepreneurs fail by not communicating their new product or service in a clear, concise, and compelling way. Put yourself in the shoes of the prospective customer and ask: “Why should I buy this product and how will it solve my problem?”

Solution: Science tells us that people prefer the path of least resistance to their end-goal. Think of it in terms of the “economy of action” and the balance of benefits vs. costs. Think clearly about how much effort it’ll take for your visitors to get to your website, get what they need, and get out? Keep things simple as much as possible.

7. Failure to innovate

Without a clear disruptive business strategy in place organizations today face the same plight as the DoDo bird – extinction! Think of Kodak, which owned the camera market for years, but couldn’t make the adjustment to the digital. Many other examples exist. Think of Blackberry, Borders, and Blockbuster in recent years.

Solution: Keeping your startup on the cutting edge of the latest technology trends will increase your likelihood of success, preserve your competitive advantage, and decrease your chance of becoming disrupted.

8. Fear of failure

Fear of failure can paralyze efforts before you even start. Don’t go down this route. Instead, keep optimistic and focus on the positives and the value proposition of what you’re offering to change the world.

Solution: Keep in mind that failure is not all bad if you can learn from your mistakes and turn them into teachable moments. Failing fast is an approach that recognizes that some of the best accomplishments arise out of hundreds of failures; innovatively this means that failing quickly can also lead to fast learning and a better chance of success in the long run.




9. Lack of teamwork

Maybe you’ve heard the expression: “Too many cooks in the kitchen spoil the broth.” This especially holds true in the world of business; when there are too many people in charge of a job or project they all tend to make their own changes/opinions and it just ends up ruining it. As one example well puts it, “That project failed miserably, there were 5 people in charge of it and no one could come to an agreement, just too many cooks in the kitchen.”

Solution: As the saying goes “teamwork makes the dream work.” When it comes to making your startup a success realize that it’s going to take lots of hard work from experts in a number of different fields. You’ll need to find folks who are passionate and committed to your vision and who you can get along with and from whom you can expect great, quality work. Also, keep it small: a team size of 6 to 10 people makes life easier for everyone as it improves communications, builds trust, and improves overall efficiency.

10. Not knowing your customer

This seems self-evident enough. After all, you want to change the world with your product or service. But you can miss the boat by a mile if you assume who your customer is and what they want without bothering to find out if you have your facts straight.

Solution. Use every available means and the extensive analytics reporting tools on the market to get a 360 degree view of your customer, and learn everything you can about their online behaviors. Remember that your customers have tons of options for getting their products so your website presence is a critical item. Give them reasons why they should choose your brand over others.

There are plenty of reasons why startups and new businesses fail. But at the end of the day, the success of your new startup will come down to a few core principles. Adopting a lean approach, tracking expenses carefully and spending funds wisely, building a great team, and keeping innovation front and center are among the best ways overall to increase your chances of building a successful startup. But there are no guarantees. Oftentimes, victory just comes down to people doing more things right than wrong. The best thing you can do is do the best you can!

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About Jeffrey Walker

Jeff is a business development consultant who specializes in helping businesses grow through technology innovations and solutions. He holds multiple master’s degrees from institutions such as Andrews University and Columbia University, and leverages this background towards empowering people in today’s digital world. He currently works as a research specialist for a Fortune 100 firm in Boston. When not writing on the latest technology trends, Jeff runs a robotics startup called virtupresence.com, along with oversight and leadership of startuplabs.co - an emerging market assistance company that helps businesses grow through innovation.