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Why startup founders fail: Over-leveraging, capital struggles, and talent acquisition challenges
Posted by Celene Robert
March 20, 2023
Launching a startup is not without its risks for entrepreneurs, and the path to success is often full of unexpected challenges.
Any seasoned founder of an established company will tell you, growing a business from ideation into a successful company will take more energy than you have, more sacrifice than you expect and more time than you imagine possible.
But it’s also one of the most rewarding experiences you can have — if you stick with it.
Today, startup founders are quitting at an alarming rate
In this fast-shifting business world, it’s not uncommon for startup founders to quit before their business becomes profitable. According to a Harvard Business Review report, over 90% of high-tech startups fail within a few years, leaving their founders scrambling for a job or new venture. And that’s just one industry.
However, there are ways to overcome these obstacles and set yourself up for a long, successful entrepreneurial journey.
If you’re considering launching a startup, or you’re already leading a growing endeavor, watch out for these three common reasons why most founders quit — and how you can protect against them.
Reason #1: They over-leverage themselves
Startups often have limited resources, and it’s common for founders to bootstrap their company or take out loans to get the business off the ground. However, over-leveraging can quickly become a game-ending problem, especially if the business doesn’t generate enough revenue to cover its expenses. In this situation, the founder may be forced to borrow more money, creating a vicious cycle of debt that can be difficult to escape.
The solution: CFO outsourcing
CFO outsourcing can help startups manage their finances and avoid over-leveraging. While you may not be in a position to hire a full-time, on-staff CFO, outsourcing this crucial role allows you to benefit from the CFO’s expertise while you’re scaling.
By outsourcing their financial management, founders can access the industry-specific expertise of an experienced CFO without having to pay for a full-time employee or manage the complexities of expanding their C-suite team. And in turn, CFO outsourcing allows founders to make more informed financial decisions and avoid taking on too much debt.
Reason #2: They struggle to raise and manage their capital
Raising capital is another major challenge founders face at every stage of the growth process. And capital raising can be especially difficult for first-time founders without a proven track record. Investors are risk averse. They’re looking for safe investments that are likely to yield a strong return with as little stress and uncertainty as possible. That can make it difficult to convince an investor to take a chance on a startup.
Bootstrapping is another option for founders, but it comes with its own set of advantages and disadvantages. Bootstrapping gives founders control over their growing business, but it puts them in a risky position and can limit their growth.
The solution: Create a strong business plan or consider alternative funding options
If you choose to raise capital using traditional funding rounds, draft a strong business plan that clearly outlines your business model, target market and profitability potential. Investors want to see that your company is a safe, smart investment. Include detailed financial projections, expected revenue and expenses, and a clear plan for how you plan to achieve profitability.
If you choose to raise capital in other ways, you can look into grants or loans from the government, your community, or other organizations. These options can provide founders with the capital they need to grow, without adding complexity or diluting their ownership or equity.
Reason #3: They bring in the wrong talent at the wrong time
Another reason many founders quit is because they struggle to bring in the right people— whether it be co-founders or support staff. Personnel issues can become a major problem, as the success of a startup often depends on the skills and dedication of its entire team.
Founders who choose to work with a co-founder benefit from an extra set of hands, a fresh perspective and shared leadership. But work inequities, personality differences and risk preferences can cause tension in this critical partnership.
The solution: Opt for HR services
By some estimates, as many as 65% of startups fail because of personnel tension. How much of this risk could be eliminated by improving your hiring and HR practices? HR services for startups provide new and growing startups with access to recruiting professionals who know how to find and attract the best candidates and leadership partners. Not only can your HR service streamline the talent acquisition process, they can help you avoid making a costly personnel mistake that can stop your startup’s growth before it starts.
Launching a startup is a challenging journey, but it doesn’t have to end in failure. CFO outsourcing, strategic fundraising, and HR services for startups can help founders navigate these challenges and stay on the path to profitability. With the right support and expertise in place, any founder can beat the odds.
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This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.