Why Startup Failures Happen
Published March 27th 2023
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About one in every five new businesses fails in the first year, with almost 50% shutting down after five years. About 65% of businesses close within 10 years after their founding. The reasons for startup failures are diverse, but many relate to insufficient legal help, inadequate research, and flaws in the business plans.
1. Legal Threats or Not Getting Sufficient Legal Help in a Crisis
Many startups face legal risks related to not getting proper licenses, not being aware of tax laws, and not obtaining legal protection for copyrights, trademarks, patents, and other intellectual assets. Further, the business may have an incorrect legal structure and no founder’s agreement. These are just a few examples of the potential legal threats that could lead to a crisis.
Prevention goes a long way, for example, getting employee contracts and founder’s agreements and protecting intellectual property. Of course, starting a business is a learning process, and most entrepreneurs are not attorneys. It’s smart to have a lawyer by your side from the beginning. That greatly reduces the chances of your startup failing from a legal threat.
2. Too Much Focus on Action, Too Little on Research
Entrepreneurs are biased toward action, not research. They love to do, do, and do. They jump into action and build things or provide services.
In the process, research may get short shrift. For example, startups may build products no one wants because they failed to talk with different types of customers and have them beta test products for feedback.
Problem definition, solution development, and solution validation are critical aspects of startup success. In the problem definition stage, entrepreneurs talk in depth with potential customers, including early adopters and mainstream types. Founders must resist the temptation to talk about products or services they have in mind.
The solution development stage is when a startup gets going on potential solutions and customer feedback. Solution validation is about testing products in real-life situations.
3. Cash Flow Roadblocks
Investors and venture capitalists fund many startup efforts. If a startup doesn’t start offering a product or service quickly enough, these investors and venture capitalists may be reluctant to continue investing. It’s not always easy to find new folks to supply new streams of cash. Cash flow issues also occur if a service or product is overpriced or underpriced.
4. Leaders Who Don’t Work Well Together
The co-founders of a startup do not need to have similar personalities, mindsets, or attitudes. In fact, it can be great if they do not since they can get more creative and complement each other’s strengths and weaknesses. However, it is essential that they work well together.
Clashes in leaders’ conflict-resolution styles, communication styles, goals, and vision derail some startups. Unfortunately, these differences may not manifest until startup operations are well under way.
5. Bad Timing
Bad timing is not necessarily anyone’s fault. The COVID-19 pandemic is one example. It helped some ventures take off while dooming others. For example, startups don’t have relationships with suppliers, vendors, and customers that are as established as older businesses. The pandemic made it harder for many new ventures to get traditional funding, and lockdowns limited many startups’ access to customers.
Market crashes and weather events are other examples of bad timing that startup founders may not be able to control. Similarly, co-founders might get very sick or suffer a personal loss that interferes with their ability to run the startup.
On the flip side, some startups succeed (or succeed more than they would have otherwise) due to good timing. Bad timing is sometimes a startup’s fault, though. A business that markets a holiday-themed service after a holiday has passed is bound to struggle.
6. Too Much Persistence
Persistence can be bad if startups focus so much on staying the course that they cannot or do not adjust to reality. A startup that cannot remain flexible or learn from its mistakes could end up failing.
Persistence works best if the business model is viable and people are making the right decisions. It can be tricky to tell if you’re being smart and persistent or setting your business up for failure.
7. Defective Business Plans
A startup could have the shiniest, smartest-sounding business plan ever, and the plan could still be deeply flawed. Common business plan errors include vagueness and incorrect financial projections. It’s fairly easy to get market research wrong or paint overly rosy pictures as to timelines or funding amounts.
To avoid this happening to your startup, one strategy is to have entrepreneurs with real-world experience help you write and fine-tune the business plan. Keep an open mind when they point out potential problems instead of assuming they don’t know enough about your business. It’s much easier to correct problems earlier rather than later.
A startup gives itself the best chances to succeed if it covers its bases legally, gets people with real-world experience to help with the business plan, and has leaders who work well together. Legal issues are fairly easy to avoid when you have lawyers from the start ensuring you don’t forget any legal aspects.