6 reasons why most start-up businesses fail
Up to 90 per cent of start-ups are destined to fail, but why is that, and how can you stop your business falling into the same trap?Peter Iantorno March 18, 2015
We've all heard the horror statistics: depending on which estimate you listen to, anywhere from 80 to 90 per cent of start-up business will fail within the first 18 months.
That's pretty grim reading for any entrepreneur looking to get a new company off the ground, but the big problem with a sweeping doom-and-gloom statistic such as this is that it doesn't address the reasons why these businesses are failing and, far more importantly, reveal how to avoid these pitfalls.
Here are six reasons why most start-up business fail, and how a new business can give itself the best chance of surviving for the long haul:
Bad business plan
As the old saying goes, "Fail to prepare, prepare to fail", and nowhere is this more apt than in the all-important business plan. The cornerstone of any business, this is where a company can be destined to fail before its even got off the ground.
The best business plans are clear, concise and appealing to potential investors, yet underpinned by an almost painfully thorough backbone of research assessing every single facet of the business, from the main income stream to the monthly expenditure on toilet roll.
The cash-flow isn't there
While a true entrepreneur will always have the drive to succeed no matter the cash-flow situation (take these three who went from broke to billionaire, for example), the fact is that businesses have to balance the books in order to survive.
Lack of cash-flow can be down to a number of reasons - most of which can be avoided in the planning stage - but one of the most prevalent ones is failure to monetise effectively or at the right time. To do this, a business must determine who will pay and what they'll pay for, and make sure the business can cope until the money starts rolling in.
The team is wrong
A 2014 study by venture capitalist database company CBS Insights found that 23 per cent of companies reported the main reason for being forced the close down as "not having the right team". When it comes to something as vital as picking the people to work in a new company, it's important that any friendship and favouritism is left at the door.
While it's important that people get on well enough to work together, companies formed between best buds can often suffer from a tunnel-vision syndrome, with nobody there to disagree with a decision or rock the boat when needed.
Failure to embrace technology
Examples of companies that have fallen victim to not keeping up with technology are all around us: think camera makers Kodak, which was hammered by the rise of the digital camera instead of photographic film; and video rentals company Blockbuster, which was completely destroyed by online movie streaming from the likes of Netflix.
As these two companies are testament to, embracing technology is absolutely vital, and while sometimes new inventions can come as a surprise, in most cases, it's yet another potential pitfall that can be avoided in that all-important planning stage. Poor customer relations
Again related to the advancement of technology, in today's world of instant feedback, Twitter abuse and online reviews, it only takes a couple of bad company-customer communications spread around the internet to send a company's reputation into the gutter. And even in a smaller local business, the power of word of mouth should not be underestimated.
It's imperative that a new company - or any company, for that matter - listens to its customers and does its utmost to make sure that any grievances they may have are resolved and then that customer is likely to return. Often a customer who previously felt aggrieved but is then won over turns out the be the most loyal.
It's a bad idea in the first place
This is the first and only point on this list that cannot be remedied. No matter how good the planning, marketing, customer care, treatment of the staff and access to cash-flow, if the initial idea is wretched, the business will ultimately fall down in the long term.
The only way to make a successful business out of a bad idea is to ditch the idea altogether before it's done too much damage and learn from the mistake, like all true entrepreneurs do.