5 Reasons Start-Ups Fail

Posted on July 18, 2014.

Here’s an interesting statistic: over 6 million new businesses get started every year,(Forbes). But even more telling is that after 5 years, only half of those businesses survive. As a commercial banker, I worked with a variety of companies for over 25 years.  I've witnessed lots of reasons some of them failed, but when it comes to the smaller, more entrepreneurial ventures there are a few common denominators:

1.     They start small and stay small.  According to the Forbes article,75% of all US based businesses have no employees. Half of these predominately home based businesses have less than $50,000 in annual revenue.  Many people start these businesses due to of work-life balance issues and so it’s hard to think about growth and they end up being consumed with work.  So because they start small, and stay small, it’s easy to just close the doors and go back to corporate America.

2.     The business they’re passionate about has a limited or no market.  It seems the buzz phrase of the decade is “love what you do”, or “follow your passion”.  That’s great in theory, but not everyone’s passion is a moneymaker. When I ask entrepreneurs what the market is for their business, more often than not, they don’t know. If you can create demand for your product or service, great! But if not, it’s best to know what will sell before investing too much time and money.

3.     They don’t admit what they don’t know.  As I’ve often said, the most successful owners I’ve worked with are the ones that know what they know, and know what they don’t know. If you know nothing about accounting, find someone who does. If you don’t know how to negotiate effectively, find someone who does. The list goes on and on. The important thing is to then actually listen to the advice these people bring to the table.

4.    They’re afraid to ask for money.  Many small businesses start with funding from friends and family.  Once the company has grown to critical mass, more institutional funding sources come into play, such as venture capital or bank debt. But too often, I’ve seen entrepreneurs who are unwilling to reach out to others.  This is especially true of non-employer based home businesses, and one of  the reasons they tend to stay small.  If you don’t have enough confidence in your product or service to seek funding, why are you doing it at all? Your time has value by failing to seek outside investment you devalue what you’re worth.

5.    They don’t focus on generating profits.  Too often businesses are launched with little analysis performed. Projections are hockey stick, pie in the sky best guesses.  And the owner is so concerned with generating revenue they don’t realize that for every $1.00 of sales generated, it costs them $1.10.   It’s just not a sustainable model and likely the number one reason half of these companies will shut down in 5 years or less. Focusing on the numbers can’t be emphasized enough.  I know I may be biased with my banking background, but trust me, I see this lack of focus too often.

Whether you’ve already launched a business or are thinking about starting one be thoughtful.  Make sure there’s a market for you product, you know how much you can make and they you have your funding secure.  Why put in so many hours of your life, if at the end you have nothing to show for it.