The first 18 months of the life of a startup is often referred to as the “Valley of Death.” Indeed, according to research performed in 2013 by the McCombs School of Business at the University of Texas in Austin, 25% of startups close up shop within the first year and 50% close within the first 18 months.
One certainty that I learned along my entrepreneurial journey was to learn from other people’s mistakes, while making as few mistakes of my own as possible. So what can we learn from those that have so gallantly failed before us? What are some common reasons startups fail?
Reason 1: Failure of the business model
You need to be brutally honest with yourself when it comes to forecasting start-up costs, revenue and expenses in your business plan. This is the stage that you need to dial back the optimism. Over-optimism is a relentless start-up serial killer. Many entrepreneurs are too optimistic about how easy it will be to acquire customers. They make the assumption that because they make an awesome web site, have a groundbreaking product, or provide a service that people can’t live without, customers will fall over themselves to get in the door. This may happen, but ultimately it becomes an expensive task to attract and win customers, and for some doomed start-ups, the cost of acquiring the customer is actually higher than the lifetime value of that customer.
Reason 2: Running out of cash money
Another major reason that startups fail is because they ran out of cash. A key job of the Entrepreneur is to understand how much cash you will need to begin with and whether that will carry the company to a milestone that can lead to either a successful financing, or to “critical mass,” a self-sustaining company with cash flow positive. Please plan accordingly. A rudimentary business plan, even if it is just to give yourself a roadmap, can go a long way!
Reason 3: Problems with your product
Most of the time, the first manufactured product that a startup brings to the marketplace is something that the market doesn’t know it needs. Henry Ford once said “If I would have asked the public what they wanted, they would have said a faster horse.” In the best cases, it will take a few revisions to get the product and market to click. For my first company, MD-Advantages, we submitted short surveys with every new modular medical cart system sold, for the first few orders.
The survey allowed us to gain crucial customer insights in how we could improve our product; from ergonomics to functionality. After all, the modular medical cart has never been done before, so we had no competitors to compare our product against. In the worst cases, the product would be way off base, and a complete re-think is required. This can be avoided by performing in-depth customer research prior to devoting your limited cash and precious time to an unproven product.
Reason 4: Not knowing when to change directions
The good news is that your competitors, typically large companies, move like a cruise ship. When they make a business change and turn the wheel, they keep going straight for a long time before the ship finally starts to turn. As a small business, you are more like a jet ski; you turn the wheel and BAM! you’re going in a new direction. Unfortunately, some entrepreneurs continue to look down while marching in the same failing direction, right off the cliff. You need to keep your eyes open for new opportunities and be sensitive to how a particular product is or isn’t selling. This is accomplished by paying close attention to your metrics and setting up a real-time feedback loop with Google Analytics or similar software. You need to know when a pivot is required, while there is still enough cash in the bank and enough time to implement the changes.
Reason 5: No passion
As an entrepreneur you absolutely, positively must exude passion about your product and your company. You must love your startup well-enough to get through the goods times and the bad. Doing so will allow you to attract the best management team and the best investors, and your passion will rub off on others too. Sometimes you may look or sound like a complete lunatic when getting overly excited about your business. But trust me, it’s infectious and begins to rub off on people around you. That passion will turn you into an Olympic Hurdler, allowing you to clear every hurdle in your lane in record time.
Disclaimer: The content in this article is the opinion of the writer and does not necessarily reflect the policies or opinions of US Patriot Tactical.