Why Small Businesses Fail: 17 Most Common Reasons

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Author
Zee Ahmed
President/CEO
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With a surge in startups and local businesses in quarantine, we’re all kind of eager to try our luck and see if we’ve got the guts to earn.

That’s fair and reasonable. A sudden rush to “go get it” and “conquer the world” hits us once in a while when we think of ourselves as the next Jeff Bezos or Mark Zuckerberg.

Let’s just stop our train of thoughts right there and think what is that “it” we aspire to create. Do we know enough about its creation, sustenance, marketing, and most importantly, its profit-generating capacity?

Such serious questions are necessary to consider before taking a big step. According to the Startup Genome report for 1010, 9 out of 10 startups fail, with the Bureau of Labor reporting on 2 out of 10 startups failing in their first year.

Why Business Fail Infographics

This article will help you get all your answers regarding how you can avoid crushing your startup in a highly competitive free market. Because believe it or not, it’s maddening out there. The stakes are incredibly high. Your small spot is always at risk. And you need to do some homework.

So stay alert on this journey and jot down some key points you think need extensive reflection!

While these reasons are some of the most common ones, there’s still a debate on their relatability to your market niche, audience, goals, and strategies. Without further ado, let’s bite into the beefy stuff.

Same old boring school story, you reckon? Wait till you know what we mean by that. Remember when you had to score well on a math test in school so your parents could get your favorite meal or toy?

Things haven’t changed much except that your favorite meal or toy has transformed into a 6-digit profit you wish to achieve. And your homework is studying your product, finances, and the market for that. Sounds fair, right? Let’s scroll down to some areas that need homework:

1) Lack of Business Model

A business model is like the blueprint for your startup. Without that in hand, no matter how hard you try to build your venture, it’ll come out deformed and unreliable. It would guide you on how to make a profit. According to CB Insights, 17% of startups are doomed to fail if they don’t have a crisp business model.

Product Without A Business Model

The “business model” for Microsoft, for example, was to sell software for 120 dollars a piece that cost fifty cents to manufacture. Without a business model, you will not be able to

  • Pitch your idea for financial assistance
  • Keep your goals in sight.
  • Return to your original idea when things go out of hand
  • Prioritize what makes you unique and durable
  • No learning

The attitude of “we know it all, dude” is most prevalent in the more educated entrepreneurs. But trust us, the market doesn’t unveil its secrets and stories to ones sticking their noses in books rather than its nooks and corners. A good book and a good exposure will make it a lot better.

Many startup teams fail to understand that learning is a two-dimensional dynamic process. How’s that? There are two-time frames that demand your team to stick their heads together and learn their business, market, customer, etc. Once before you step into the market and the other after you do so. Yes, the teams, too proud or oblivious to keep learning, eventually bite the dust.

2) No Cash in Hand

That’s a bummer. What is a startup without crisp notes brimming your bank accounts and lockers? This question is a valid concern. Startups would likely turn down an idea as promising as Amazon if there’s not a specific cash flow at hand.

Ran Out Of Cash

Entrepreneurs ignore the fact that it requires an excellent business period to make any profit, probably years. In the meantime, the cash for sustenance is crucial to keep the machines and minds going. That’s the reason your business idea crumbles in no time.

3) Poor Web Design

Would you ever purchase from this poor looking website? Never!

Poor Web Design

Did you know?

It takes about 0.05 seconds for users to form an opinion about your website that determines whether they’ll stay or leave.

CXL

Even Google Research pointed out that it just takes 50ms for users to form an opinion about your website design.

Google Research

Did you check our homepage? We put so much attention into creating the best first impression for our clients.

We design & redesign world-class websites for your business for only $49/month with FREE ultra-fast hosting and maintenance. 😃

Homepage One Smart Sheep GIF

We have designed the following websites for our clients:

OSS CLients

Think of any brand that lies amongst your top 10 at the moment. Not one of them works without a presentable website. That just tells!

Startups that do not invest enough in a useful website usually go by the following opinions:

  • The customer cannot form a good rapport with the seller.
  • Website designing and sustenance is so expensive I cannot afford them.
  • I cannot hire and pay a permanent IT guy to take care of the website.

Here are the five signs that confirm your website is the cause of your startup failure:

  • Out-dated design created with cookie-cutter templates.
  • Lack of useful information, e.g., contact, establishment, vision, and services
  • Missing updates on the product
  • Unavailability of a mobile-friendly version
  • Missing customer chat section
  • Sales and codes not available on the website
  • Missing clear product images or videos

This might be perhaps the oldest and most basic of all the causes of startup failures—a tough competitor, ruthless and dauntless. The international free market plays by only one rule – may the best man/woman win!

4) Reach out to mentors

The last cause in this section is immensely related to your confidence and ego. Think of it this way. You’re enrolled in a biochemistry course in college, and you do not understand a word of what the teacher says. You have a test the next day for a handsome number of chapters. What do you do? Call it quits? Wait a minute. A cousin lives a few miles away and happens to be a biochemistry major in a university. But what if he ridicules you for not being smart enough?

You’ve now got two options. One – get enough courage to drive down to him and ask for help. Two – fail. It’s that straightforward. Teams who fail to reach out to their mentors and established business people in their specific fields are highly prone to failure. The choice is literally in your own hands.

Of course, you know how to play by team rules. You were part of the college council or captain of the cricket team at school. Do you think startups work by the same rules? Let’s find out.

5) Not the Right Team

A startup is not your Saturday night party where your best friends will show up, crack a few jokes, play a few games, hang out together and deliver the best product in the market the next Monday. It’s business! Harvard assembling the right team is crucial.

Hbr.org 2016 06 The Secrets Of Great TeamworkiPhone 5 SE

A great team needs people related to the same field, creative minds, moral individuals, trustworthy partners, and the same vision to work. That requires coming out of your comfort zones and choosing without bias. This human failure leads to building an incompetent team, laziness, or nonserious towards the goal.

6) Wrong partner

Many startups would choose a partner for many reasons. It relieves the burden, keeps you on track, shares the responsibility, and gives you courage in the face of impending failures. Agreed. But did you know that they might be the top reason why you fall flat in business?

A wrong partner may exhibit the following behaviors that lead to the crisis:

  • They tend to become your shadow, oozing out every detail and plan from you.
  • They claim the credit without any hard work.
  • They entice you to quit work, so they don’t have to do it either.
  • They treat colleagues, clients, and employees badly, causing damage to the manifold.
  • They overstep boundaries.

7) Ineffective Leadership

A startup is like a miniature state. It cannot function or be responsible without a leader appropriate for its vision.

Ineffective LEadership

Here are some qualities you will find in an ineffective leader ruining a startup:

  • Fails to keep the team active
  • Harbors prejudices against team members and subordinates
  • Makes big decisions without consulting the team – too authoritative
  • Prefers personal gains over team benefits
  • Over-drains his/her workers beyond their capacities or capabilities

Well, we could write a whole book about it with probably six volumes. But that would just drain you. Let’s move ahead.

8) Inability to learn from failure

This goes out for everyone involved in a startup. Trial and error is by far the most natural and effective way to gain success. “Trial and ignore” is the most efficient way to throw away that success.

Startups would rather blame external circumstances – market trends, unsympathetic customers, national concerns – than their inabilities. Persistence is the key.

Successful

You’d be surprised to know what a Harvard Business School study of venture-capital-backed firms in the U.S published in the April 2010 Journal of Financial Economics found out. It quotes, “previously failed entrepreneurs were no more likely to succeed than first-time entrepreneurs.”

The ability to learn from failure demands a psychological reflection. That is deemed too time-consuming and sometimes unnecessary by the failing parties. They’d instead just gather the broken pieces, find another investor and start all over again. And we all know they’re most likely to fail again.

Most of you would rather blame the other factors for failure because the product or service you’re planning to provide is too personal for you.

Making a sacred icon out of your dream product is the biggest mistake any entrepreneur can make. Have a look at the following factors leading to disasters in startups:

8) Poor Product

Not to sound harsh, but it’s true. As much as you hate it, there are “poor products” in the market. MIT wrote a great article about product quality.

What Does Product Mean

There are quite a few reasons why your product or service ultimately drowns in the free market ocean:

  • The idea has not been executed rightly.
  • The product had loopholes, faults, technical issues, etc.
  • It’s outdated and did not adapt to changing market dynamics.
  • It’s too expensive or fragile to be shipped, considering shipment as part and parcel of modern trade.

9) No market need

Uh, what? Did someone tell you you make your market for your product? Then you need a myth-buster. According to Forbes, the number one reason why startups fail is “no market need.” It could be because of two main reasons:

  • The product is already provided by many businesses or companies in the market, easily accessible, and highly used by a majority.
  • The product isn’t needed at all by anyone whatsoever. It’s unnecessary!

Consider this, would you make a company that sells skateboards in a desert area? That is insane and absurd. Would you launch a fancy bookshop in a city where a significant chunk of the population lives below the poverty line? No! No! No! And no!

Let’s look at it from the perspective of the founders of the failed Treehouse Logic, a visual configurator platform company. They believe “Startups fail when they are not solving a market problem.”

10) Give it some time; it’s like a premature child.

You don’t establish a startup after years of hard work to shut it down within a few months. Startups wouldn’t give time for the market or customer to adapt or get attracted towards its product and immediately run for “ shut it.” That is an unprofessional approach.

How Long Does It Take To Be Successful

A Wikipedia account of Alibaba reveals that “In 2002, Alibaba.com became profitable three years after launch.” Precisely why we see the likes of Jack Ma once in a decade, outwitting the Chinese e-commerce industry by a storm.

11) Forget the idea; take action.

Human beings love fantasies. We thrive on them. There’s a reason Marvel and DC make billions of profit with each new film. The same capacity to imagine and dream may barricade your chance to build a profitable startup. It’s simple. Take hours, days, months of your time “thinking” or “planning.” But that is precisely what you’ll have. A plan. An idea. Abstract.

Five excuses startup owners make when they’re drifting into the fantasy/procrastination/thinking zone are:

  • I’m preparing myself for future obstacles.
  • I’m productive by studying market statistics (even if it’s for 10 hours a day).
  • I’m just relaxing. There’s too much pressure on me.
  • I’d either be great or nothing, so I need to work more on my idea.
  • Every successful startup owner overthinks. That’s what makes them unbeatable.

And after months of “thinking,” you’re left with bedsores rather than best scores.

Wait, we haven’t talked about THE CUSTOMER yet? Let’s just dive into the biggest mistakes you’re likely to make here:

12) Ignore Customers

It wouldn’t be entirely wrong to say that the customer/client is the king of a market, especially a free market. Are your chips not crisp enough? Pass. Is your couch not comfy enough? Pass. Can your prices not go down? Total pass. And just like that, your business is a failure.

CB Insights claims that 14% of startup failures had chosen to ignore customers. Quite a backfire. You have to show that you care about the customer. Make them feel worthy. Failing startups may skip the following fundamental questions:

  • Why has the customer stopped buying my product?
  • What kind/edition of your product got the most positive customer reviews?
  • Is my target audience going to afford or need this anymore?
  • Involve your customers in product development

Most of the startups would not bother setting up an efficient channel for customer feedback. Either they assume it’s unrelated, or they want to believe their startup can survive without healthy feedback. Anyhow, it comes down to their loss.

VoterTide founders have commented: “It’s easy to get tricked into thinking your thing is cool. You have to pay attention to your customers and adapt to their needs.”

13) Pricing Issues

Often startup owners and teams find it challenging to balance their money inputs and outputs. Trying desperately to make a heap of profits, they cut their own lives short.

The product is acceptable as long as there’s someone to buy it. Increasing prices to either make a handsome profit or save a dying startup is the worst possible strategy ever. CB Insights declares 18% of startups that failed had chosen to ignore pricing issues.

CXL has written a great article on pricing experiments that have boosted conversion rates up to 40 times.

Pricing

Marketing your products is essential for a fresh startup and an old established business. It never goes out of fashion. Here are some of the attitudes of marketing that’ll lead to setbacks:

14) No Marketing Budget

It’s not always the case that you don’t have money for marketing. Sometimes, you’re not sparing cash for this aspect of the business you think is not crucial.

As much as 14% of startup failures had no or less marketing budget. They would or could not invest in advertisements, brochures, public announcements, etc.

But don’t worry, you can market your business without any cost with:

  • Blog.
  • Create an online tool
  • Participate in relevant forums
  • Join Twitter and/or Facebook
  • Have an affiliate program

And much more.

15) Poor Marketing Strategy

You wish to sell a product to senior citizens of a state, and your advertisement runs on a music channel. That’s what a low strategy looks like. Startups face defeat when they do not consider the following critical factors while preparing a marketing strategy:

  • Latest market surveys that are relevant to your startup
  • Your vision behind the startup
  • Future goals
  • Your present and near future finances
  • Cost of marketing
  • Target audience
  • Channels of marketing like TV, newspaper, radio, collaborations, etc.

17) No Savings

It’s easier to build a bridge, but without repairments every year, it’ll devour a whole lot of humans in no time. Sustenance is a core principle in every startup. The collapsed startups did not care for gathering savings to sustain a business because

  • They were investing in marketing more than on the product.
  • They were selfish enough to spend more of themselves (owners) and leave the workers behind. The more valuable part of a company is its workforce. Ignoring them is calling for a punch in the face.
  • They maintained a poor financial record to gauge their demands and needs.
  • No extensions or branches

Sustenance may require branching out if the business is going well. Startups that converge their resources on a single crowded spot end up suffocating their product. The web has to be expanded to shift workload and manage the design. This can be explained by the following choices of entrepreneurs ceasing to work:

  • Not buying or renting warehouses when product manufacturing soars.
  • Not opening branches or outlets to reach out to high sales zones.
  • Not facilitating the workers living remotely with incentives or remote workspaces.

The list can go on and on. Every startup is unique in its purpose, goal, reach and outlook. To put them all into one article can hardly suffice to explain the causes of their failures.

This article is written with the sole purpose that you do not make the mistakes many have made before you. Your legacy shall outshine. If there is a significant chunk of startups failing to make a mark, there’s still a considerable percentage that succeeds. We wish you well.

Best of luck with your ventures!