Reasons Why Businesses Fail
What are the reasons why businesses fail? Every year, thousands of wide-eyed and optimistic entrepreneurs embark on a journey to create the next big thing. With passion ablaze and a belief that success is attainable, they set out to change the world. The brutal reality, however, is that most will fail.
A recent study by CB Insights studied the post-mortems of over 250 failed startups. They found 70% of tech startups fail, and 97% of seed or crowdfunded consumer hardware companies pull the plug. The odds are against success- but not without a silver lining. Every failure presents an opportunity to learn. We can glean value in terms of what to do and what to avoid.
In his book “How Not To Die”, Paul Graham mentions two major reasons for startup failure: Simply running out of money, and the departure of a critical founding member. Often the two occur simultaneously.
Death Of a Startup
There are countless reasons a startup can fail. In our experience, a lack of knowledge and poor planning are often the most serious issues clients face. Even with boundless enthusiasm (and sometimes even a boatload of cash), it’s what business owners DON’T know that causes the biggest problems.
With an idealistic vision of what starting a company looks like, many new entrepreneurs avoid the thought that their business might fail. While confidence is always necessary, disaster awaits those who never take the initiative to safeguard their startup against common and avoidable mistakes. We’ve put together a list of the most prevalent issues plaguing new startups, with case studies for each.
1. Lack Of Market Need
Many startups fail simply because nobody wants what they are offering. 42% of the startups analyzed by CB Insights failed because there was no demand for their product in the market.
Start small. Conduct proper market research & feasibility studies, and utilize focus groups to find out what potential customers think of your product. The insight and feedback gained in this stage can be invaluable for your company.
Entrepreneurs often overlook the market conditions and variables — whether the market is ready for their product or not, the target demographics’ purchasing power, market saturation, etc. A good idea is not enough. The market must be ready for your product- whether they know it or not.
Zune was designed to be Microsoft’s answer to Apple’s iPod. The reason Zune failed was simple — Microsoft didn’t understand the market. If they did, they would have realized nobody wanted Zune. It was a product that offered no innovative features nor did anything superior to its main rival. People didn’t want an alternative to the iPod. Late entry into the space and poor marketing efforts gave the Zune little chance to win. A portable MP3 player…new and improved? Nope.
2. Running Out Of Cash (And Giving Up)
The second biggest reason for startup failure –reaching the end of the runway with no take-off. Maintaining a steady cash inflow is extremely important but not all businesses can start pulling in money right from the beginning. Running out of capital doesn’t necessarily mean the death of your company- but not knowing how to adapt does.
Many successful companies run at a loss for extended periods of time. Running out of money from a seed or series-A round of funding is not uncommon. You’ve heard the importance of an MVP (minimum viable product) but if you lose sight of your companies USP (unique selling proposition), you’re toast. By effectively demonstrating the value of the product, a company can raise further capital and extend the runway.
Case Study: Tesla (2002-Present)
The electric car maker giant started on very shaky grounds. In 2002, Elon Musk started Tesla alongside SpaceX. He invested $90 million in the companies but it wasn’t enough, and costs kept increasing. By the end of 2008, Tesla was on the verge of bankruptcy. The obituary was written and the press was ready to announce Tesla’s death at any moment. But as we know, Musk soldiered on and Tesla prevailed. He was able to deliver the first Tesla Roadster and secured further capital to keep the company alive.
3. Lack Of Sustainable Growth
“When you stop growing you start dying.”-William S. Burroughs
Forward momentum requires constant growth. The day you cease to provide increased value to customers, you open the door for someone else to come along and steal your crown. Without the momentum to escape the competition, newcomers will push you out of the market. Without growth, economies of scale cannot be realized, and your costs will remain prohibitive to profits.
In an ever-changing world, sometimes growth means changing business models or pivoting in a new direction. When a product has run its course, entering a new market or a new industry can be the necessary growth to keep a company alive. A failure to pivot, or pivoting late, can mean death.
Case study: Blockbuster (1985–2010)
The ubiquitous, American-based company provided movie and game rental services with over 9 thousand stores globally. In 2000, a small web-based movie rental company called Netflix approached Blockbuster with an offer to sell their company for $50 million. The Blockbuster CEO, blind to the rapidly shifting playing field, dismissed their “very small niche business” model. In the following years, Netflix pivoted to online streaming, rendering brick and mortar rental stores like Blockbuster obsolete.
Blockbuster failed to pivot and now exists only as a memory to millennials, their parents, and the butt of online jokes.
When facing a lot of direct competition, there are certain steps you must take to cement your market standing. Failure to do so could seal your company’s fate in the startup graveyard. To stand out, one must offer something new or something much better than what already exists. Taking competitors into consideration and developing a proper marketing strategy is crucial. Perhaps most importantly, the product must be priced just right. This becomes more complicated as competitors attempt to undercut each other in an effort to lure customers.
If you’re a pioneer and first to the market, you’ll need to take a different approach. You need to make it hard for potential competitors to enter the market by creating barriers to entry. These include patents, government rights, access to specific distribution channels, economies of scale, establishing yourself as the market leader and namesake, etc.
While ignoring the competition is a recipe for disaster, obsessing over it is not healthy either. The mission should be to provide as much value as possible to the customer. If you can find better ways to give more to your customers, you will have a bright future ahead.
Case Study: Toys R Us (1948–2017)
One of the largest toy store chains (and a piece of children’s souls everywhere) shut its doors recently. The downturn began with a 10-year partnership with Amazon. Toys-R-Us agreed to pay Amazon $50 million a year plus a percentage of sales to serve as an exclusive vendor. With a massive level of sales, Amazon began allowing other toy vendors into their ecosystem. Toys-R-Us sued Amazon and attempted to launch its own website to sell toys online, but it was too late. Toys-R-Us failed to compete with other online retailers’ prices. Plummeting sales and mounting debt left Toys-R-Us with no choice but to file for bankruptcy in late 2017.
5. Poor Management
Faulty recruitment practices, internal conflicts, poor communication, and slow decision making are just some of the headaches that come with an incompetent leader backed by an unqualified team.
A common mistake business owners make is believing they can do it all on their own. As any successful entrepreneur knows, the truth is it takes a team. Everyone has strengths and weaknesses. The founder’s job is to know each employee and hire the appropriate team members.
Case Study: Pan American Airways (1927–1991)
Once largest air carrier in the US, all that survives is its iconic blue logo after it went out of business in 1991. Poor leadership and an inability to solve internal conflicts were the two big problems for Pan Am’s management. Over-investing in existing business models and a lack of innovation brought about the company’s downfall. These issues combined with corporate mismanagement, complications involving US regulatory policy, and the government’s inability to protect its largest air carrier lead to the going out of business in 1991.
6. Having a poor product
In the end, everything comes down to the product. Because of this, there are many ways to fail at providing value to the customer. Consumers must feel like they are getting more than what they pay for. If the product doesn’t offer enough value to justify the cost, people will either not purchase it, or return it. Proper marketing efforts and branding are required to present your product honestly. If a product is marketed in a way that misrepresents the true value of the product, customers will be unhappy and you lose their trust. If the quality is lacking, then you’ve already failed, and there won’t be much hope.
Case study: General Magic (1993–2011)
General Magic was a company associated with Apple and had one of the largest IPOs of the 90s. It boasted partnerships with companies such as Sony, Panasonic, and AT&T. It was the hottest and most mysterious company of its time, shrouded in secrecy as they created a highly anticipated product. In 1994, they launched multiple devices using General Magic’s innovative touchscreen interface — and they all failed. While they spent hundreds of hours developing and testing their technology, they didn’t spend nearly enough time testing the product with consumers. Turns out the market didn’t want a heavy, expensive mobile device with a dimly lit screen that was hardly usable outdoors.
7. Premature scaling
One of the first things founders do after getting established and raising capital is hiring. This is the classic pitfall of premature scaling. Simply put, premature scaling is expanding your business before your product is ready for the market. Founders will often feel the urge to spend money left and right on things that “feel” necessary, but rarely are. The focus is diluted away from the core product and market.
As a company moves too fast, technical debt grows out of control. For software companies, hastily written code that is “good enough” to launch an MVP becomes a weak foundation, vulnerable to frequent breaking. Sprint cycles turn from weeks to months, and the benefit of agility is lost. Pivots become harder and harder, and new features take a prohibitive amount of resources to build. Problems are swept under the rug, and eventually, they come back to bite.
Case Study: Groupon (2008-Present)
Groupon started in 2008 and allowed users to get discounted goods and services by buying as a group. It pioneered the concept of early adopters by introducing coupons to the Facebook and Twitter generation, becoming known as the “fastest-growing company ever”. It was seeing extreme success. As they rushed to scale quickly, things took a turn for the worse. Continual reports of huge losses drove the share price lower and lower. Groupon’s mistake was prioritizing new customer acquisition instead of customer retention. It sought to scale while not dealing with pre-existing issues. Although not dead, Groupon is hardly the behemoth it once was expected to be.
Will my startup fail?
The question you should be asking is — why do startups succeed?
Because the odds are against you, you should focus on the practices that improve the chances of success. We already know what kills startups-so do everything in your power to not make the same mistakes. But for guaranteed success, you need more.
In business school, they teach the functions of management-the first being planning. Proper planning leads to every other aspect of good management. A solid plan involves taking into consideration all the current variables at play as well as forecasting future variables. All bases must be covered. Planning also facilitates decision making, helping to avoid conflicts in the future.
Discipline means that you do not lose focus, get distracted, or become lethargic. Far too often business owners either lose focus or get distracted with other things to the detriment of their business. Sometimes they even start new businesses or attempt to expand their startup while before finding its place in the market. A business in the startup phase requires much more attention than an established business, requiring founders to be proactive, as opposed to reactive.
Like everything in life, startups will have its ups and downs. What matters is that you do not lose hope. Keep pushing forward while focusing on the vision — the value you are bringing to customers. The day you stop caring is the day you’ve signed up for a plot in the startup graveyard.
Summary And Next Steps:
An entrepreneur who spends cash wisely, understands and adapts to the competition, develops best management practices, focuses on the product, and grows their business sustainably is setting their company up for a higher chance of success. Although following these guidelines are not a guarantee for success, not following them is a recipe for failure.
At SUPERTEAM our mission is to give entrepreneurs the knowledge and support they need to succeed. Our solution architects come from notable Silicon Valley tech companies and utilize their experience to help others. Check us out at www.superteam.io to learn more about how we’re empowering founders to make a difference.
Step-By-Step Guide On How To Fail: 7 Reasons Why Businesses Fail was originally published in SUPERTEAM on Medium, where people are continuing the conversation by highlighting and responding to this story.