Most small businesses fail. That’s the bracing reality facing entrepreneurs today. Despite their vision, drive and marketing savvy, they will often see their firms stall in a few years and eventually exit the market.
For example, according to small business research, 90% of startups fail, and 50% never make it to their fifth year. About one in three survive for ten years, and only four in ten make a profit.
Survival rates tend to be lower for classic startups — those building a product or service based on new technologies and having geometric growth potential (think venture-backed tech firms). But even traditional companies have a steep hill to climb before they pass their break-even points. According to a Bureau of Labor Statistics study, only 54.3% of small businesses founded in 2016 were still alive four years later.
Why do so many startups fail? There’s no simple and universal answer. They tend to exit the market for different reasons and may have several negative forces affecting them simultaneously. However, consulting firm CB Insights developed a list of the top 12 causes of startup flameouts. Their reasons, based on an analysis of 111 business failures since 2018, follow (ranked from most to least common):
1. Ran out of cash or failed to raise new capital (38% of cases)
2. Didn’t meet a market need (35%)
3. Ignored competitors or got outcompeted (20%)
4. Had a flawed business model (19%)
5. Ran into regulatory or legal barriers (18%)
6. Failed to address pricing or cost issues (15%)
7. Didn’t form a leadership team with diverse skill sets (14%)
8. Released its product or service too early or late (10%)
9. Launched a flawed product (8%)
10. Had conflicts within its team and with investors (7%)
11. Failed to execute a strategic pivot (6%)
12. Got burned out personally (5%)
What can we take away from this list? The main lesson is startups fail for the reasons you’d expect them to. They exhaust their financial resources and can’t tap new funding sources. They build a company around a market need that never existed or failed to materialize. They launch a viable product or service, but competitors “eat their lunch.” They bet their futures on a flawed and untested business model.
These common missteps are highly preventable. If you want to build a successful business and remain in operation for years, you should master the fundamentals. Here’s what you need to do:
• Create a comprehensive business plan that defines every aspect of your business.
• Thoroughly analyze the market need for your product or service.
• Prototype and test your offering with potential customers.
• Model the finances of your product or service so you know how much it will cost to create and sell and how much profit will remain.
• Establish a high-quality accounting function to assure financial viability.
• Build a digital marketing function to take your product or service to market with scale and measurability.
• Hire the best people you can afford.
Finally, create a performance dashboard to help you evaluate progress toward goals. If your key performance indicators (KPIs) flash red, act immediately to troubleshoot the problem (or problems) and take remedial action. If you don’t take decisive steps to prevent your company from failing, who will?