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Why so many small businesses fail

So you’ve been thinking about that great business idea and are weighing the odds of launching it. There’s no doubt that your invention can change the world! It just makes so much sense. But you’ve also read the research that roughly 8 out of 10 people who start new businesses fail within the first 18 months. Base on the stats, the chances are slim that your startup or small business idea will succeed. So what now! Should you give up and walk away, or give it a shot?




Well, to be sure, there are plenty of success stories out there. And despite the failure rate, there have never been more tools and resources available to the budding entrepreneur. To increase your chances for success though, it actually helps to review some of the proven mistakes that derail most startups.

These are some of the biggest reasons why startups and small businesses tend to flame out in the first year or two.

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. 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.

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?”

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.

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.




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.

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.




We don’t want to leave on this altogether pessimistic note. Please 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.



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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.