Factors That Predict Business Failure
The “Top 20” factors that predict business failure
So what were those 20 factors behind startup failure? In fact, they represented nearly all instances of startup failure, starting with the most popular and descending to the least popular:
1. No market need. A whopping 42 percent of post-mortem letters admitted that a lack of market need in some way contributed to those businesses’ demise. For example, Patient Communicator wrote that the majority of doctors simply wanted more patients, not a more efficient office.
2. Lack of cash. Even if your business is profitable on paper, if you don’t have enough cash to pay your employees or vendors, you could go under. About 29 percent of post-mortems listed running out of cash.
3. Inappropriate team. Your team is the driving force to make your vision a reality. If these employees don’t have the experience, the passion or the problem-solving skills to execute and improve on your idea, you’re dead in the water, like the 23 percent of startups that referenced team issues as an ingredient in their failure.
4. Strong competition. Sometimes, the competition is just too fierce to take on. For example, upon Wesabe’s demise, its founder revealed that the company just couldn’t compete with Mint. It’s one of the 19 percent of companies that referenced competition.
Related: 5 Ways to Recover from Startup Failure
5. Pricing and cost issues. Profitability is a simple equation of your costs against your pricing. If you set the prices too high, you won’t be able to compete, but if you set them too low, or your costs are too high, you won’t be profitable, like the 18 percent of companies that mentioned it.
6. Bad core product. About 17 percent of companies admitted their product wasn’t good enough to make the company succeed. Without a strong product, it’s virtually impossible to grow.
7. Lack of a business model. A surprising 17 percent of startups admitted not having a business model to drive their efforts. They came to market with a product, or an idea, but no infrastructure to back it.
8. Bad marketing. “Bad marketing” here refers to one of a few different possible causes, including too much money spent on marketing, ineffective marketing or a single bad campaign that trashed the startup’s reputation. Some 14 percent of companies cited this reason.
9. Customer neglect. eCrowds is one of the 14 percent of companies that cited customer neglect as a main reason for failure; eCrowds ignored or de-prioritized customer feedback, and couldn’t improve its product as a result.
10. Bad timing. When good ideas come too early, the market may not yet be ready to buy. When they come too late, the market is saturated. Roughly 13 percent of companies claimed this as a primary reason for failure.
11. Loss of focus. Strong starts and passionate leaders aren’t always sustainble for the long term. When you lose your focus halfway through a development cycle, your team can crumble; 13 percent of companies cited a lack of focus.
12. Intra-team conflicts. Infighting isn’t good for any organization, especially when it’s among high-ranking team members, or worse, partners and investors. About 13 percent of failed companies cited this as a reason.
13. A pivot gone bad. When your original plan isn’t working out, you pivot — but if that pivot goes in an unprofitable direction, your startup won’t last long. Ten percent of companies in the list tried to pivot and failed.
14. Lack of passion. If you try to build a business without really being passionate about it, you are much less likely to be successful, like the 9 percent of companies that claimed lack of passion as the main reason for their failure.
15. Bad location. Meetro is one of the 9 percent of companies that cited a bad location as a reason for their failure; the startup worked perfectly well in Chicago, but could not expand to other urban areas because it failed to adequately grab the attention of those residents.
16. Lack of financing or investor activity. Like a lack of cash, a lack of initial investor interest caused 8 percent of startups in the study to fail prematurely.
17. Legal hurdles. Whether it was getting sued, navigating legal disputes or trying to establish a legal operation, 8 percent of startups succumbed to challenging legal hurdles.
18. A lack of advisors or network. You don’t need a mentor to build a business, but it certainly helps to get that outside expertise; 8 percent of startups admitted to not having a network, and not having advisors to help guide them in their decision-making.
19. Burnout. I’ve written about the dangers of entrepreneurial burnout before. The data indicates that 8 percent of startups get closer to failure when their entrepreneurs burn out.
20. A failure to pivot. Though pivoting incorrectly can lead to failure, not pivoting at all can be nearly as bad, with 7 percent of failed startup entrepreneurs wishing they would have pivoted when they needed to.
Is level of education important? Studies say yes
Even for those who maintain that a college education isn’t essential to successful entrepreneurship, alternative educational programs are well worth considering. Such programs are able to teach skills and provide resources to both experienced and new entrepreneurs that cannot be accessed when working all by yourself.
Beyond networking with other passionate people, educational programs offer a great place to start learning practical skills that can reduce the learning curve for running your company. Consider these three ways continued education remains a crucial opportunity for aspiring entrepreneurs:
1. By Providing Access To Valuable Relationships
Many universities and educational institutions are contributing to their local startup ecosystem through incubator and accelerator programs. These programs connect young entrepreneurs to real startup resources that are harder to come by when you are starting out on your own — in some cases, leading to job opportunities and access to funding for student-led projects.
2. By Growing Your Ability To Work With People Of Various Backgrounds
To be successful as a business leader, you will need to be able to work with a wide range of people. Employees come with all different personalities, and the more diverse the set, the better at problem-solving they are. Educational programs offer the opportunity to both work with different personalities on projects and interact with individuals from different cultures.
3. By Teaching Leadership Skills Critical To Success
Half of all businesses fail by their fifth year, and only 80 percent make it past the first. You will need sharp leadership and management skills to avoid becoming one of these statistics.
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