12 Common Reasons Start-Ups Fail…and How to Avoid Them

12 Common Reasons Start-Ups Fail…and How to Avoid Them

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On a list of qualities a successful entrepreneur should have, ‘an appetite for risk’ is usually one of them. This is because many business decisions in some way or another involve taking risks. But, merely making the choice to start up your own business venture is in itself risky.

It can involve cashing in your life savings, borrowing money from anyone who will give it to you – from your friends and family to financial institutions – and possibly even giving up a comfortable job in the corporate world to pursue an opportunity you have identified.

International statistics claim that an astounding majority (usually between 70% and 90%) of start-up businesses close down within the first two years. Experts in the entrepreneurial field unpack some of the most common reasons why.

1. What plan?

If your planning is not done correctly, your business will fail, says Sharon Reed, founder of the Vuka Mentorship Programme. “If your plan is right, nine times out of ten, someone’s going to help you.

If your plan is just based on fairytales and waffle and you come from an emotional point of view that you think you’re going to save the world, nobody will take you seriously,” Reed explains, adding that it doesn’t have to be hundreds of pages long; you can have the best plan in five pages.

You must identify the needs of your customers, a price that suits those needs, and if there is growth opportunity in the customer segment you are going after. If you do this, it’s likely that your plan will receive support.

“Plans have to come from customer need and the assurance that you have the experience or the know-how to make this happen. You can’t do your planning until you’ve done your homework on the market.”

2. Selling everything to everybody

Reed says: “Many small businesses don’t understand what their business opportunities are. They haven’t really understood what’s needed in the market.” A reason for this, she says, is a lack of understanding of how to research market needs. If you don’t understand what the market opportunity is, how do you position yourself to take advantage of that opportunity?

 

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Pavlo Phitidis, CEO and co-founder of Aurik Business Incubator, says you cannot craft a business without engaging your customers to understand how they buy, what value they perceive you have to offer, what price they will be prepared to pay, what terms and conditions of trade they are happy to engage with you on, and what features and adaptations your service or product needs to have in order to compete with other sources.

“Unless you undergo that activity before you start, your idea is nothing more than a fantasy. You’re guaranteed to fail on the first turn,” Phitidis says. His advice is to identify 20 customers before you launch the business and to test your service or business with them. Craft your service or product as close to their needs as possible.

According to Phitidis, in the first three years it’s important to understand what business you are in, who your customers are and have proof of concept. “90% of your activity should focus on finding a market and crafting a product to suit that market,” he says.

3. Failure to mitigate risk

Phitidis says that the way to avoid failure in the face of risk is to practice foresight. If you can’t practice foresight based on experience, use your imagination and a good analytical process.

If you can’t do that, make contact with people who can act as a sounding board for you and talk through the various scenarios that may face an initiative you undertake in your business. He says it’s necessary to shed light on the road ahead of you. “The ditch will be there, but you can change into four-wheel drive and move around the ditch.”

Further, Phitidis says failure can be driven by the external environment. For example, an earthquake in Italy could collapse the factory that produces the product you sell to customers. Or it could affect your customer’s operation and their ability to pay you.

As an entrepreneur you should always be thinking about risk mitigation.

Why is it that you only supply one product? From one country? Produced by one factory? The external environment has hundreds of activities that could cause major stress and risk for a business, and lead to its failure. Read the news, keep in touch with what’s happening in your industry, spend time with your customers and at all costs avoid getting too comfortable, Phitidis advises.

4. Growing too quickly

“Don’t accelerate the growth of your business until you have built underlying systems to deliver that growth,” Phitidis says. He adds that if you do find a market and it responds to you, and you suddenly accelerate the growth of the business but you can’t deliver, the damage to your reputation and brand will lead to your failure.

Ed Hatton, owner of the Marketing Director, agrees that sometimes a company grows faster than what it can sustain. Hatton says entrepreneurs might be inundated with sales, yet they find themselves in a situation where they can’t pay the bills.

Another point of failure, says Phitidis, is the way you decide to build your business. “If you build it in such a way that you are the centre of the business and that without your presence running and operating the business day-to-day it collapses, you are doomed to fail.”

You need to ask: How will my business run without me? As an entrepreneur, if you start a business without the intent of building systems in the business and rapidly identifying people who can operate those systems for you, you are subjecting yourself to massive future failure, argues Phitidis.

5. Lack of skills

Allon Raiz, founder and CEO of Raizcorp, says entrepreneurs may fail due to a lack of certain skills – but adds that skills can be learnt. “I never had Excel skills or speaking skills, I went out and got other people to give them to me.” Raiz explains that he went on courses and got help from friends because he understood that he needed certain skills. He adds: “We have many deficits, but it’s about filling those deficits with skills.”

Reed says a common misconception is that you think you can fix a car, therefore you can run a business. “We tend to think that because we have the skill we can do the work,” she says. It’s not only important to have a skill in the industry, but also to show leadership. “Some people have more passion and lateral thinking than others. But everybody with the right grooming can learn to think more laterally,” she adds.

According to Phitidis, one of the biggest causes of failure is when one of the most vital ingredients of entrepreneurship in the start-up phase is lacking; this could be passion, enthusiasm or optimism.

“Optimism is an energy that says the world and the future will be better if I do this; it ignites me to create the business.” He says passion is the fuel that helps you overcome the numerous obstacles you will face before making your first sale. Enthusiasm, he explains, is the veil of delusion that you have to have to keep bashing a way at it and believing that it’s going to come right.

A lack of commitment contributes to failure as well, says Raiz. “Commitment is passion’s poor cousin. Passion is important for the start, but commitment is what keeps you together,” he explains. Too often entrepreneurs misinterpret hard for wrong. They think it’s hard to do it, therefore it’s wrong. “The underlying thing about commitment is that your purpose for doing this should be clear.”

6. Running out of cash

According to sharon Reed, a common mistake amongst start-ups is unrealistic business plans and financials. Entrepreneurs develop financial requirements that don’t suit the opportunity, she adds. “Always try to grow from the smallest base. As a start-up the last thing you want is debt. If you can pay for it in cash, rather do so.”

Try at all times to have at least three months’ cash flow in your business and keep overheads and debt ratios as low as possible. “If one or two of your customers can’t pay you for a time period or you lose business, you have three months to find more work.”

Similarly, Allon Raiz says start-ups will often put together a “wonderful business plan, with a beautiful Excel spreadsheet which shows they’re going to make so much money, break even at such and such a point, and they’ve raised money in accordance with this J curve – but life doesn’t happen that way.”

He says too often there’s no tolerance for challenges and start-ups run out of money. They should double the break-even point, and then work out if they have enough cash flow for that amount. “I would halve sales, increase cost of sales by 20%, increase costs by 50% and then work out when the break-even is.”

Hatton agrees that sometimes a business’s expenses are too high and the margins too low. “This happens if figures are optimistically set in the planning stages and sales don’t live up to this optimism. The business quickly consumes all the resources the entrepreneur started with.”

Entrepreneurs should make sure they have enough working capital to stay alive. Plan for the worst case, and monitor the forecast like a hawk. Do frequent comparisons and if you see the gap widening look at your business plan.

7. The wrong partners

“Partnerships in general are very difficult to manage; initially they’re fine, but once the money starts coming in, there can be a difference of opinion, and this causes conflict,” says Reed. She recommends clear job descriptions that are established upfront and documented.

Further, she says that if you require skills the other person can’t fulfil, don’t force them. “When you bring another person into the business, between you you’ve got to decide what it is you can’t do.”

Reed says a bad partnership can be fixed, but this depends on how far the problem has progressed with the partners. “Maybe you need a mediator to help identify an organogram of functions and understand where the problems are arising.” But, if you can’t get past that, one of partners can offer to buy the other out. If these negotiations fail the company may close down.

“From the word go decide who is going to lead the company. If you are hesitant to do this in the beginning, it’s not going to work. If a partnership is not established contractually the business is likely to suffer.”

Reed believes it is naive to think that both partners are on the same page. She advises that if you are going to go into partnership, bring in a third person to help put an agreement into place. “Even if it costs you a few thousand rand upfront, it’s going to save you a lot more money in the long run.”

8. Getting into business for the wrong reasons

According to Raiz, too often people get into business for the wrong reasons. “Unless you have something to sell, someone to sell it to and you can make a real profit, then don’t go there.” He says the majority of small businesses he has come across have not learnt how to productise. “They don’t know what they are selling, they don’t know who they are selling to and they don’t have a clue if they are profitable or not.

Instead, they have a perception that they are or aren’t.” Raiz explains that this results in their not being able to cost properly because they haven’t considered the complexities of non-direct costs.

9. Not reaching out

Raiz believes that entrepreneurs have access to significant resources, including family, friends, business associations and literature. But, he says, often they don’t want to reach out to those resources because of pride or ego. By comparison, most stories of successful entrepreneurs show that they have reached out.

If I had gone to get advice from people I could have saved one or two of my business opportunities.

Raiz says that start-ups should approach as many sources of advice as possible until they find the right fit. “Everyone needs a mentor, a person with whom they can share their experiences. You might see the ship sinking but another person can see it’s just a hole that can be fixed.”

Raiz also believes the company you keep plays a role. You should ensure the people around you are supportive, encouraging and positive. “There’s no doubt that had my wife double guessed me at any point I would have given up.”

10. Fear of selling

“People are scared of selling or talking money,” says Reed. “The only way to get your business going is to knock on doors and sell it, there’s no other choice.” She adds that the more doors you knock on, the more you will sell.

According to Raiz, many entrepreneurs hide behind the myth that someone else would be better than they are at selling their business or product. The reality is that there is no one better to sell your business than you. “If you go onto YouTube you will see Steve Jobs in some dungeon underneath some British electronics store talking about an exciting thing called an iPhone with 15 people listening.Bill Gates, until he resigned, kept selling Microsoft.”

For Raiz, a big indicator of someone who is going to close down their business is one who has convinced themselves that someone else is better at selling than they are. The reason for this is a fear of rejection or criticism. But, it should be viewed as an opportunity for feedback instead, or to pick up on other opportunities.

Not having a sales plan can also lead to failure, says Ed Hatton. If you don’t know who you are selling to, why they will buy from you and not someone else, and how to sell to them, you’re about to learn a painful lesson. “Very often there is an over-reliance on the product and under-reliance on sales and marketing. This contributes to lower than expected sales,” he explains.

11. Lack of flexibility

Acharacteristic of many start-ups is the inability to iterate their methodology or product with market feedback, says Allon Raiz.

He says start-ups are often committed to their idea because of feedback from family and friends. But the likelihood of that being what the market will accept, in its current form, is low. “The idea will have to be polished through many layers from pricing and product design to marketing and features before it becomes appropriate for the market.”

12. Not paying attention to your business

Another trait common amongst start-ups is the inability to understand accounts, manage those accounts and forecast and manage cash flow, says Hatton. He says business owners should be looking at their financials day-to-day or at least month-to-month and not just relying on their accountant once a year.

He also believes entrepreneurs should take the time to learn book-keeping. “Many people don’t understand that they are making losses or why – they don’t understand the basics. Training is widely available but a lot of it is just common sense. You can easily look at your bank account and see who hasn’t paid you.”

Reed suggests that entrepreneurs start writing monthly reports about what the business is doing. “Write them to yourself, pretend you’re going to present them to someone. Ask yourself how the operation’s working, how HR is performing, whether employees are fulfilling their duties, and if payments are functioning properly. Make notes of these things.”

[box style=”gray,info” ]When to Give Up On Your Idea

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