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Why Most Startups Fail (and How You Can Avoid It)

ByAvneet Narang,
business.com writer
|
Mar 22, 2018
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> Business Basics
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Here's how to ensure your business isn't a casualty during its first year of operation.

No one likes to think about failure, especially when they've just launched a new business. A study by the U.S. Small Business Administration found that nearly one-fifth of startups fail within the first year. 

Below are seven of the most common reasons why startups fail in their first year and how you can make sure your business isn't one of them.

Starting a business for the wrong reasons

The primary reason for any business failing is often related to the intent behind starting the venture. Did you start your business to make lots of money? Can you afford to spend time with your loved ones once you start your own business? Are you starting your business so you don't have to answer to anyone anymore?

While these can be perks of being a business owner, most entrepreneurs experience these benefits after years of consistent efforts. They shouldn't be your main reasons for starting your venture.

The justified and appropriate reasons for starting a business – reasons that result in establishing a thriving company – include the following:

  • You are passionate and love what you would do. You strongly believe that your services (or products) will meet the demands of the market.
  • You are self-motivated, determined, patient and have a positive outlook.
  • You do not let failures set you back. You believe in learning from your mistakes and using those lessons to attain success next time.
  • You are independent and take charge anytime something needs to be dealt with.

Poor management

Many times, startups fail as a result of poor management. Newbies usually lack the required experience and skills. Business owners who do not assess their shortcomings and seek appropriate help tend to fail or go out of business very quickly.

Seek external help. A lot of startups outsource back office tasks to external providers. These services can be related to accounting, data management, technology, marketing, or even research and analysis tasks.These providers are competent and skilled. Business owners, however, should be cautious when it comes to data security. Ensure that the company you outsource these tasks to has proper and up-to-date security tools and processes in place. 

Inadequate funds

Inadequate funds are another major reason why most businesses fail in their first year. Many new business owners lack a proper understanding of their cash flow. And a few have no idea how much capital they will truly need. As a result, most startups are forced to shut down. It's also common that newbie business owners have impractical expectations of what profits will be, which contributes to a business failing.

To avoid running out of cash and ensure your expectations are in line with reality, determine how much money you will need – this figure should include not just startup costs but the costs involved in making sure your business stays in the market for the long haul. Estimate the funds you will need for a minimum of one or two years in advance. There are many business startup calculators that can help you predict how much money is required to launch your business.

Location is important

Location is a crucial factor in determining the success of your local business. Here are a few factors to consider when selecting the location for your new venture:

  • Where are your customers situated?
  • What is the traffic, parking and accessibility of the location?
  • Where are your competitors located?
  • What is the current state of the space? Is it safe? 
  • Does your local government offer any incentives for basing a new business in a particular area?
  • How well will the community respond to a newly-established business?

Inappropriate business planning

Anyone with event-management experience knows that without careful, systematic and strategic planning, along with consistent effort, it is impossible to pull off a successful event. The same holds true with launching a new business. A solid business plan is a must. Your plan needs to be practical and based on correct and up-to-date information to ensure your venture has the best chance of success.

Be sure that your business plan takes into account the following factors:

  • The nature of the business, your objectives and how you envision success
  • An analysis of the market
  • Your workforce requirements
  • The potential complications (as well as the solutions)
  • Your financial requirements
  • A thorough analysis of competitors
  • Your marketing strategy
  • A thorough budget analysis

Editor's Note: Looking for a service to help you with your business plan? We can help. Use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:

 

Overexpansion

A sixth reason why new businesses fail is overexpansion, which occurs when entrepreneurs misjudge how rapidly they can reasonably grow their enterprise. Rather than rapid growth, focus on gradual and consistent growth. At the same time, you shouldn't restrain growth.

Once you establish a strong customer base, as well as a decent income, let your success aid your decision. Signs that indicate expansion is viable include difficulty fulfilling customer orders (or requests) based on current resources and a workforce struggling to reasonably meet production requirements.

No website or digital presence

To put it in simple terms, if you are a business owner today, you must have a website and a strong digital presence. Across the globe, there has been a steady rise in the number of internet users and e-commerce sales. This is only expected to increase in the coming years.

Businesses today, at a minimum, must have a well-designed and easy-to-use website that helps consumers learn more about their offerings and other important information. If you have a local business and a local audience to target, make sure each webpage list your business address, contact information and hours of operation. You must also list your business in Google Places so customers can easily find you. If the nature of your business does not involve sales directly to customers or if you get the majority of your clients through recommendations or networking, your website should make it easy for prospective clients to reach you. 

In addition, you must have a strong social media presence that relays everything consumers should know about your product or service. Your customers are on social media every day. Having a strong digital presence allows you to tap into that market segment easily. If you don't have a social media presence, you may appear unprofessional and will lose business to your competition that has a stronger presence on social media.

Finally, the most important factor that determines the success of any startup is you, the owner. For many successful entrepreneurs, failure was not an option. Backed with passion, hard work, determination and a positive outlook, many of these entrepreneurs deemed any kind of setback as a chance to learn and grow from the experience and rebound from it.

Avneet Narang
Avneet Narang
See Avneet Narang's Profile
Avneet Narang brings more than 10 years of experience in digital marketing, branding, advertising and public relations to her role as a Marketing Manager at Cogneesol, a well-recognized specialized services company. Avneet’s primary focus is to increase brand popularity and global customer base through innovative digital strategies. After spending nearly a decade working in this field, she understands what truly drives conversions. At Cogneesol, she is in charge of the marketing, communication and business development campaigns of the company. Apart from strategic business development initiatives, she manages media relations, branding, promotions, and web development. An proficient researcher, she also keeps abreast of the latest market trends and demands, and provides useful business insights to the management.
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