Startups are companies that are in the initial stages of business. Typically characterized by high costs and little to no revenue, the founders of these companies usually want to develop a product or service they feel is lacking in the market.
But starting a business is a lot harder than most people think. So rarely is a business in tune with its niche that it can float along with minimal effort. But why do so many businesses fail? For that matter, how many of them fail? The reasons run deep, but here is what you should know before starting your own business.
Key Takeaways
- A startup is a company in the initial stages of business.
- Business owners say they’ve failed because the money ran out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an industry expert.
- Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.
What Is a Startup?
As noted above, startups have little to no capital when they are established. Company founders can find capital to develop their businesses through family and friends, lenders, the Small Business Administration (SBA), angel investors, and venture capitalists.
These companies tend to be small, typically with fewer than 30 employees. As such, they are often classified as small businesses. Small businesses make up about 46% of the working population in the U.S., so their growth and success are vital to the U.S. economy.
Despite their promise, as many as 90% of startups fail. Statistics show that as many as 3,200 startups went under in 2023 alone. These companies were private and backed by venture capital. Failure isn’t limited to the initial stages, as many businesses shutter within the first five to ten years.
Given the number of new businesses that are established, why do such a high percentage of them fail? If you poll former business owners, you will get a wide variety of reasons as to why their businesses failed.
Note
The SBA defines a small business as an operation with fewer than 500 employees. The SBA reported a total of 33.3 million small businesses in the United States as of 2023, which make up 99.9% of all U.S. businesses.
Money Ran Out
But, simply saying the money ran out doesn’t explain why a business fails. So why did the cash flow dry up? Was it due to poorly managed costs or because sales weren’t high enough? Money running out also relates to:
- High expenses, including startup costs
- Improper budgeting
- Bad planning
Another is the inability to obtain financing or further financing needed to sustain a business. This is especially important in the early days of any business until it can start generating profits.
Wrong Market
The target market plays an important part in a company’s success. The more narrowly defined your niche is, the easier it will be to market to the right audience. But, many business leaders don’t consider their market during the planning stages.
Too many people try to start a business by targeting everyone as their demographic. This doesn’t work out well. Next, they try to target everyone in their town. Again, this proves to be too broad a scope.
Lack of Research
You have to know what your customers want. Too many would-be entrepreneurs go into the market thinking they have a great service or product to offer, but they fail to realize that nobody wants it. By doing your homework and researching your market, you will know exactly how to meet your potential customers’ needs.
Note
The Small Business Administration considers a business a startup when it hires at least one employee.
Bad Partnership
A partner is needed when starting a business. One of you is an expert in one area while the other is an expert in another area. Keep in mind, though, that your ideas for the company may conflict. Without a clear resolution, you can expect to see internal strife.
You work harder and your partner works less, but your partner thinks they are working harder than you. Ultimately, the business dissolves because the partnership didn’t work. By having a clear business plan that lays out the duties of each partner, you can avoid most conflicts before they even arise.
Bad Marketing
It could be said that a business boils down to two aspects: marketing and bookkeeping. If you excel at both, it doesn’t matter what you are selling or offering because someone will buy it. The sad truth is that most entrepreneurs know their craft and little else.
Instead of fumbling through your marketing campaign, hire out that aspect of your business. It costs money, but if done right, it will bring in much more than what you spent. It also frees you up to concentrate on other parts of the business—aspects with which you may be more familiar.
Not an Expert
Too many entrepreneurs start their businesses because they need a job. They have a vague idea of what they are doing, and they think that because they’re better than their peers, they should make a living doing it. The sad truth is that without business skills and real expertise, these entrepreneurs are destined to struggle.
How to Avoid Failure
It seems that most businesses are destined for failure. But there are key points to not becoming one of the 10% that fails right off the bat. The following are some of the major tips we can offer to help you avoid failure in your first few years as a business owner:
- Set Goals: Know exactly where you need to be and where you want to be. Without a goal, you’re just wandering around aimlessly and setting yourself up for failure.
- Research: Know everything about your market. Know what customers want. Know that they will pay $9 but not $10. Know their incomes, their desires, and what makes them tick. The more you know, the more you can pitch to them.
- Love Your Work: If you don’t love what you do, it will show. You must be passionate about your business, or it will just be a job.
- Don’t Quit: No matter how great of a business you have, know that you are going to have downtimes. There will be periods when things are dragging along and you question your decision to embark on this path. This is a time to put in extra hours, press harder, and make it work.
What Is a Startup?
A startup is a company that is in its initial stages. Put simply, it is a company that is trying to get itself off the ground. This type of business typically doesn’t have much cash or income but does have very high costs. They may be headed by one or more individuals who want to develop a product or service for which they believe demand is high. These entrepreneurs tend to find capital from those close to them (family and/or friends), lenders, and venture capitalists. Although startups are often associated with technology companies (because of the sheer number of tech startups), they span different industries, including healthcare and education.
How Many New Businesses Started in 2023?
As many as 974,000 new businesses were established between the first and third quarters of 2023. A total of 311,000 of these were launched in the third quarter, which is a decrease from the 349,000 businesses created in the same quarter of 2022.
What Are Some of the Common Mistakes that Startup Leaders Make?
Some of the most common mistakes that startup business leaders make include not budgeting, going through cash too quickly, not doing their research, not defining a (specific) target market, failing to establish a business plan, and hiring employees too quickly. Doing research, being frugal with cash, and creating a plan can help startups avoid failure.
The Bottom Line
Many startups fail within the early years, indicating that many things need to go right for a business to succeed. Fortunately, you can be one of the businesses that thrive in the first year. To do this, you need to follow the tips outlined above, and, most importantly, you have to test your idea, do your homework, and make sure it will work before you jump in with both feet.
Correction-May 11, 2022: This article previously misstated the percentage of business failures throughout the years.
Read the original article on Investopedia.