Common Reasons Startups Fail
For every Tiktok, there was a Quibi.
If you’re asking, What was a Quibi?, you’re not alone.
As 3 billion of the planet knows, TikTok is a mobile video-sharing service that gives its viewers endlessly entertaining content on their phone.
Compare that to Quibi, a company that entered the video-app industry by creating short-form media content for phones. The app’s selling point was this: they would make “entertaining” videos with Hollywood actors that were 10 minutes or less.
If Tiktok was amateur, Quibi would be professional was the company’s thinking.
With this confidence in mind and an envy-inducing 2 billion dollars worth of capital, Quibi released their mobile streaming service on April 6, 2020.
6 months later, Quibi shut down its company as 90% of its early users had deleted the app. It now holds the infamous title of Most Expensive Startup That Failed.
Welcome to the cold world of startups.
According to the SBA (Small Business Association), 20% of businesses fail out the first year. After 5 years, over 45% of businesses shut down their doors for good.
These are sobering statistics.
But they’re also equally enlightening.
Research has shown the exact reasons why these companies rang its own death bell and went out of business.
By knowing these pitfalls, new businesses can avoid these common mistakes and increase their chances of having their business succeed.
Whether you receive $5000 from a family friend or $2 billion dollars like Quibi, cash – or, in this case, the lack thereof -- is one of the most common reasons startups go belly up.
Each business knows it’s an uphill battle getting initial cash to fund a business. However, getting seed capital is the first of many challenges in the creating-a-business ladder.
An overlooked issue happens in the months after a business is created where the money isn’t as free-flowing: sales’ goals might have not been met, unexpected business costs might arise, and/or payroll demands might increase.
To make sure businesses have enough money to stay afloat, they need to have a plan of how to have working capital at all times.
Step 1 is having a good business plan as it will help document and regulate cash flow.
Step 2 requires businesses taking a proactive approach and exhausting all funding options. The good news is, there are quite a few funding options at a business’ disposal. This includes:
Incubators or Accelerators
Grants (from public and private institutions)
Lastly, your own money.
Applying to these financial outlets takes a hefty amount of time and research. Yet the rewards of applying are worth it.
Not only do the funds obtained from these sources give a business owner greater financial flexibility in the initial stages of the startup, but they also mitigate the inevitable financial challenges each business will face in the months ahead.
If you’re looking for funds or greater financial flexibility, Iota Consultants offers comprehensive insight into the funding opportunities available to your business.
Most businesses fail before they even begin.
That is, there are too many businesses that fail at the idea stage of their service/product by NOT doing one simple action:
The genius of a business idea does not completely lie in the quality of the idea itself. It lies within the RECOGNITION that there is a market demand for the service/product.
Many businesses “jump the gun” by creating a service or product and hope a sea of customers will swim to their idea.
But without proper market research, this approach is destined to work against any business. In a post-mortem analysis of 100 startups that failed, 42% of startups went out of business because they realized there was no market need for their product.
To avoid this pitfall, the first steps a business must take is by answering 3 simple questions:
1) Why would the market want my product or service?
2) If there is a market, is the market big enough that it will justify my business’
starting and ongoing cost?
3) How is my business different from my competitors so that I can get the edge
in the marketplace?
No entrepreneur wants to devote years, money, and time into a product only to realize there’s no market for it.
However, as obvious as this sounds, creating a product or service without a market to match is cited as the number one reason of why most businesses fail.
THE BUSINESS PLAN
Each startup knows a business plan is essential for a company’s success. They not only attract the confidence from outside investment, but the business plan gives a concrete roadmap of where the business is headed to the owner and employees.
But the reason why most startups fail is not necessarily in the initial foundational details of the business plan, but in the improper adaptation (or the improper re-addressing) of it.
Markets change, economies waver, customer loyalty is ever-shifting. But by constantly re-addressing and reflecting on a changing market, an entrepreneur will have critical knowledge in how to adapt their business accordingly.
This is not to say to completely change the foundation of a business plan every time you revisit it. The foundational business plan will always have:
Business mission and goals
Employees/structure of company
Opportunities and threats within the broader market
Capital needs, projected cash flow and various budgets
However, for entrepreneurs to have the clearest understanding of how their business is performing, their business plan should always be updated to adapt to the changing market.
These updates may include:
New and old competitors changing their prices
New or past investment opportunities
Regulations/laws that might impact the service/product
Optimal company performance initiating the business to scale.
The development (or stoppage) of new and old products/services, based on risk analysis and customer need.
To have a comprehensive understanding of the ever-shifting demands of the marketplace, research and analysis must be done on a frequent basis. Having outside business consultants can help provide unbiased and expert assessments of how your service/product is performing, and can offer optimal business solutions of how your company can continuously succeed in the marketplace.