Our Startup hybrid accelerator Startup Port published this article in 2013. We had about 24 startups in our portfolio that year. Some made it and some failed. It was always very hard for founders to accept failure. As I went over my saved drive folders I came across this article and wanted to share it with you.
No one should take the content of this article personally or in a negative way. We simply share facts and hope people evaluate their position on their own merit.
Small Company Failure: How to Avoid the Business Graveyard
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Updated September 01, 2023
Causes of Business Failure and Downfall and Letting Go of Your Business
We understand that nothing is scarier in business than failing a company you’ve invested so much time, energy, and money in. But this is a reality of life, especially in business decision making.
According to the U.S. Bureau of Labor Statistics, 20% of small businesses fail in their first year, 30% fail in the second year, and about 50% of small businesses fail after five years of operation. Out of the millions of businesses that start per year, how will you avoid the business graveyard?
But there is an even worse statistic, and that’s the one about “startups”. The VC analysts and Crunchbase, Pitchbook and other startups data analysis state that 78% of startups fail. The reasons for their failures are too long to list here, but one can guess that there are many self-inflicted reasons besides the traditional ones.
Causes of Business Failure
There are many causes of small business failure, but these few mistakes can cause any business to fail—small or large.
– Not Enough Attention to the Bottom Line
Any financial advisor will tell you that “Cash is King.” Cash flow determines whether your company will be able to operate. Without budgeting and close attention to spending, businesses will fall in the negative and entrepreneurs will lose their investment.
– Not being able to generate enough funding
You cannot pay attention to the above problems (Not paying attention to the bottom line) if you don’t have the proper financing to properly run your business. If you “don’t know”; your roadmap, your delivery process (what to provide the end user), your costs, your value, your runway, and more importantly how to generate revenue you will never be able to fund your business.
– Insufficient Market Research
Market research involves understanding your customer, the competition, what drives the success of a product or service, potential issues that your business might encounter, and other valuable pieces of information. Market research saves companies time and resources by determining if a business’s market strategy will best serve the industry, or if they should pivot to another strategy.
– Hiring or working with the Wrong People
Some business owners see employees as expenses and they don’t understand the value of investing in quality training and team building up front. As a result, the leadership doesn’t spend enough time to carefully build the staff. Other business owners, and notably more successful ones, view employees as assets and investments, regardless of the price.
– Weak Mission Statement and Values
Every organization needs direction. Mission statements and company values may seem like a tedious step, but they create the “roadmap” necessary for business operations. Mission statements and company values also create a sense of authenticity among investors and customers.
– Poor Customer Service and Feedback from users
Customers are not only a source of revenue. They serve as a marketing or advertising tool, convincing new prospects to do business with you. With the increase in intense search platforms businesses with poor customer service will find it difficult to obtain new customers and survive. Not asking for feedback and not making changes/adapting accordingly is a crucial mistake. The customers are the fuel of the business, and they can be very useful if you want to improve your solution.
– Inability to Adapt and not being Agile
Staying safe and comfortable might help you get past the first year of operation, but close-mindedness and little flexibility are what really causes the 50% to fail within the first two years. Entrepreneurs should prepare for change by staying flexible in business strategies. More importantly, “one” cannot be the source of “all”. Owners and founders must understand that success is based on the interaction and support of a “team”.
– Not properly Managing Cash
Manage your cash flow, or the funds that enter and exit a business, by tracking expense reports weekly or monthly. Cash flow includes accounts receivable, accounts payable, expenses, and debts. If managing cash flow is not your strongest contribution, hire an accountant or CFO in your business (although as a business owner, you should monitor your funds consistently). You also need to be extremely transparent on how you handle incoming funds and payments. It is unethical and also legally not correct to commingle business and personal accounts and expenses.
– Not Evaluating Your Partners
Weekly meetings and monthly reviews and not allowing them to provide input for the business. Not properly and objectively monitoring the employee/partner performance and not raising awareness of what to improve.
– Not Revisiting Business Strategy Often
Not touching base with your team on a weekly, monthly or quarterly manner to review past and prepare for the next period’s strategy, or not reflecting upon this yourself, to improve operations within your business. Not conducting constant analyses such as the SWOT tests, revisiting your business model canvas, or simply not looking through your numbers to create new agile strategies.
– Not Staying Informed about the Industry
In order to stay competitive, stay informed by following changing industry patterns. Not reading articles to see what the customers or competitors are using and adopt a new strategy around that.
– Not Paying Attention To Your Advisors and Mentors
Not paying attention to your advisors and mentors can have negative consequences in various aspects of your life, particularly in professional and personal development. Advisors and mentors typically offer valuable insights, guidance, and support based on their own experiences and expertise. Ignoring their advice may result in missed opportunities and potential pitfalls.
– The fear of losing control and losing it all
Most business owners and startup founders have a deep fear of losing control and an emotional attachment to the startup which makes it hard to let go of ownership. However, it’s important to recognize that giving up some level of control can be necessary to facilitate the growth and success of the startup. Basically having 50% of nothin equals nothing, this is also true with all the other partners values, 10% of nothing equals zero!
– Not Spending “FULL TIME” on your business
Not spending full time on your business is one of the biggest reasons for startup business failure. At least someone (if not the entire team) must be 100% devoted to the business day and night. Only when this devotion is made can a business start becoming successful and run efficiently. If you cannot do this, forget about starting a business!
And Finally, The Time Of Letting Go of Your Business
Certain external causes of business failure are not preventable or predictable. As you can see from the very small list above, there are many more issues that can make your business stumble, technical, financial, personal, and so on. Before you fall further into debt, lose precious time, lose other opportunities, make sure to evaluate your position and personal finances to see if it is worth continuing your startup business operations. It is crucial that you know when to pull the plug and let the business go. Unfortunately, “wishing” your business to succeed is not the answer, there are many other factors that need to align perfectly for success, and if you don’t pull the plug you will do a disservice to yourself, your credibility, your family, your partners and more importantly to your time and future.
We are not being cynical or negative about startups. We are just sharing real facts that have been lived time and time again for decades related to certain aspects of startups (for that matter all businesses in general). Our only wish for startups is for them and their team to be successful, but at the same time learn from the past mistakes of others that resulted in collapse and failures.
And, importantly please read our post about not paying attention to your advisors and mentors. Ego plays an important destructive role and if you do not control your personal and your team’s ego the killer will lurk right in front of you!
Here is the link: https://startup-port.com/2023/11/26/not-paying-attention-to-your-advisors-and-mentors
