The top lessons we have learned from failed start-ups

It is a sad fact of life that most business startups fail.

According to Bloomberg, as many as 8 out of 10 businesses fail within the first 18 months. This frequently-quoted statistic suggests that as many as 80% of startups fail within the first few years and that insolvency is a constant risk for all. However, the reality may not be quite as bad in every sector.  Starting up with the next big thing in technology may be a bigger risk than opening a coffee shop, for example, but it is probably true that your startup could have only a 50-50 chance of still being in business in a year or two.

If you believe in yourself and your business, you won’t believe that yours will be among the 50% that fail. But the important thing isn’t the number of businesses that fail; it’s understanding why those businesses failed, and how you can prevent the same issues from threatening your business.

We look at the top reasons for business failure.

1.   No market need

The secret of starting a successful business is finding a gap in the market and filling it. Coming up a with a great new idea is all very well but, unless people want to buy it, you might as well not have bothered.

So, King Camp Gilette saw the need for men to shave without danger and invented the disposable razor blade. Sir Alan Sinclair believed that there was a need for his electric trike – and was sadly, and expensively, mistaken.

2.   Not the right team

Your team is your business. If you don’t have employees with the experience, skills, passion and the problem-solving capacity to execute your idea, improve it and run with it, you don’t have a business – or at least you will not have one for long. Getting the right people is expensive – see point 7.

3.   Outcompeted

Sometimes, the competition is just too big, established or well-funded to take on. Back in the 1980s, Sony’s Betamax was a superior video recording format to JVC’s VHS, but VHS was licenced to other manufacturers and became the industry standard. Of course, Sony survived, even if its Betamax division did not.

Sometimes the competition is simply better at what it does. AskJeeves was a successful search engine until Google came along.

4.   Pricing versus cost issue

Profit is vital for your startup. If you set your prices too high, you simply won’t be able to compete. Set them so low that you can’t cover your costs, and the more business you do, the more it costs you.

Many startups make the mistake of thinking that in order to succeed they must undercut their competitors. Their costs may be higher for a good reason. Getting the costs right should be a key part of every business startup plan – and every startup business should have a detailed plan.

5.   Poor product

Without a strong product, it’s impossible to succeed. You might gain a few sales as the newcomer to the market, but if what you have to offer is not as good as your competitors, you will not be looking at much in the way of repeat business.

Even world-beating companies can make this mistake – for example, Apple’s Newton PDA flopped because it simply wasn’t good enough.

6.   Poor marketing and PR

Despite many assertions to the contrary, it has been proved many times that there is such a thing as bad publicity. Poor marketing and PR is a recipe for disaster – and expensive. The Ratner’s Jewellery chain – which had been trading for decades – was brought to its knees by a well-publicised marketing gaffe.

Good marketing can be expensive – but it can also be an essential investment. There is no point in opening your doors for business if your potential customers do not know that you are there.

7.   Inadequate funding

There may be many other reasons for a small business to fail, but inadequate funding and poor cash flow remain among of the biggest causes of all.

Starting a Business on a shoestring is possible, but it increases the difficulties and the likelihood of failure. Getting an adequate financial foundation for your business is crucial. Borrowing money from family and friends is one solution, but the chances are that you will need cash for premises, equipment and simply to keep the lights on in the first few months, while your business finds customers. It can mean more cash than most people can raise by themselves.

Business funding specialists Rangewell have solutions for startups. They point out that as a startup your business will face challenges – the statistically high chance of failure means that many lenders will be unwilling to advance funds. They suggest that various kinds of finance may be necessary, from Asset Funding for equipment and vehicles to a Working Capital Loan to deal with overheads while your business finds its feet. You may even need funding to buy in stock or to hire staff.

Of course, even once you have launched, you still face financial challenges – indeed, they may actually become more acute once you start trading. Cashflow becomes all-important. Poor cashflow is mainly caused by late payment of invoices but there are some solutions which any small business needs to know. Being strict and upfront about payment terms is vital. Regularly credit checking customers is a valuable precaution. Another solution may be to arrange Invoice Finance which can ensure your business can receive cash as soon as you issue an invoice.