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The top reasons startups fail

Posted by Kanika Sinha

April 4, 2016

No one wants to start a business only to watch it fail. Yet, many startups fail in the first years of their existence.

Grand ideas propel startups in the beginning, only to be met with failure later on. Unfortunately, it’s an all too common problem.

In this article, we look at the top reasons startups fail. We’ve found the reasons are quite similar across the spectrum of startups, and we present them here in an effort to help you avoid the common mistakes that have cost startups over and over again.

Reason #1: Startup doesn’t fill a need

If your startup doesn’t solve a problem or meet someone’s need, there really isn’t a reason for an entrepreneur to start the business.

While it seems like there is always another invention or product to be created, it’s only useful if someone wants it. In other words, it must be a solution to a problem. The product must fit the market.

It pays to survey the market and do your research before taking the big leap. If you don’t understand your target market, you probably won’t make it.

Remember – just because you think your product is great doesn’t mean someone else will.

Reason #2: Startup runs out of cash

Many startup entrepreneurs begin their businesses with their own budget, and many of these run out of cash before their idea makes its way to launch or somewhere further in the process.

There are many reasons startups run out of money. They include:

• Poor budgeting.
• Poor planning – in other words, they under estimate how long it will take to raise additional funds.
• The burn rate is too high.
• A lack of venture capitalist funding.
• Or, a combination of these.

To avoid running out of cash, do your due diligence. Make plans for how much money you’ll need and at what rate you’ll use it.

The most important thing you can do is manage your cash flow. Plan on when and how much revenue you’ll generate so you can avoid this costly mistake.

Reason #3: Hiring the wrong people

Venture capitalists are highly concerned with a startup’s team. This is often a startup’s biggest challenge. If you don’t get your team right, you’ll have trouble getting funding, and you’ll have trouble trusting your team to take your startup to the next level.

Hire the right people, and create a skilled, experienced team that complements your skills, and your weaknesses. Hire a team you feel comfortable with, and one you can set loose to drive your business.

Reason #4: Growth hindrance

If you can’t sustain growth, the odds are against your startup’s success. Growth problems are another top reason startups fail.

Your business model should be able to sustain your business at various sizes. If you can’t sustain your business at different growth levels, and you can’t adjust your business model, your startup will fail.

How do you avoid this? Make a plan for your growth that includes one, three and five year plans.

Final thoughts

We’ve looked at the top reasons startups fail, but we want to leave you with one last thought.

If it were easy to create a startup and take it to profitability, everyone would do it. The most successful entrepreneurs know their limitations and hire competent, experienced staff to fill in the blanks.

According to one study, about three-quarters of venture-backed firms in the United States don’t return investors’ capital. Another study by the National Venture Capital Association estimates that upwards of 30% of venture-backed businesses fail. This supports common knowledge that states that for every 10 startups, nearly four will fail completely.

If you want to be one of the startups that succeeds, it pays to learn from the top reasons startups fail and avoid these common pitfalls. To further help you avoid these top reasons for failure, check in with us.

If you’re a new startup looking to get your new business off the ground, and you want to avoid the top reasons startups fail, we are here for you. We can help answer your questions and guide you through the process. Outsource your finances, payroll, HR duties and more to us. Contact Escalon today to get started.

Image copyright: peshkov / 123RF


Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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