startup failure statistics

Top Reasons Startups Fail

Business closure happens for all kinds of reasons. Learn how to prevent startup failure by identifying the causes. Read on to find out what are the most common reasons for startup failures. 

It’s a long way to the top and it’s a long fall when you don’t get a good grip when you’re climbing. For aspiring entrepreneurs, it can be an incredibly daunting journey to success.

The startup failure rate is reasonably intimidating. According to Failory, 90% of startups are likely to fail due to a variety of reasons. It may not be a very reassuring and comforting figure but that is reality. More often than not, a lot of business owners make rookie mistakes that could’ve been avoided by careful and proper planning.

One way to ensure your success is by taking the time to learn.  But where do you start? You kick off by looking at both sides of the coin. Learn from mistakes that led to startup failure and implement the ways to prevent them.  

Startup failure: Why they happen

startup failure rate

Startup failure is usually caused by a combination of factors. In this list, we’ve collected the most frequent ones in most post-mortem startup stories. Here are the top reasons why startups fail.

Late Reactions

The Titanic sank because they failed to turn the boat around at the last second before it hit the iceberg. Failing to pivot when there are dangerous roadblocks ahead is one of the biggest reasons for startup failure. You need to be quick about doing something—a bad product, a bad employee, or a bad decision—before it causes everything to go haywire. You can’t afford to stay complacent when issues arise. Once you detect the problem you’ve detected a problem, you need to come up with a solution and implement it as soon as possible.

Imercive shared in their post-mortem that they failed to pivot at the right time. They stuck with the wrong strategy for too long that they could no longer reverse the effect. In the end, they exhausted their capital and could no longer execute a new strategy.

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Setting Limits

Too eager to get things done, startup owners often overlook the importance of setting limits. A small business is prone to burnout since there’s a tendency to overwork and overhype everything. As a startup owner, you need to learn when to cut your losses and where to redirect your efforts. Do not expend more energy than necessary.

A lot of startups fail because of overworking their staff, pursuing needless conquests, and overspending on unnecessary areas. This issue is especially prevalent within the tech industry since the workers are susceptible to long hours and tight deadlines.

Silicon Valley was heavily criticized for its workaholic lifestyle that led to tragic cases of suicide. Nowadays, more and more startup owners are learning to implement a work-life balance while still being productive.

Using Network

What good is having investors when you don’t ask for their advice? Quite often, it’s not just the lack of network that causes startup failure, but not using them to one’s advantage. Failing to get your investors involved or refusing to ask for help is one of the key reasons for your business going down the drain. 

Finding the right mentors is essential for a startup to grow. When a startup owner doesn’t tap into his or her connections for help, it can lead to a downward spiral. A Cambridge University Press publication reported that overconfident CEOs are more likely to get sued. 

Legal Complexities

Small businesses are the biggest victims when it comes to all the legality traps. There have been cases when a startup got caught up in a world of legal complexities because they’ve violated a contract. A lot of competitors and the government itself are quick to establish rules and policies about their products and services to protect their own integrity. They can easily shut down a business with a list of penalties when it steps out of line. This is especially common for high-ranking enterprises who keep a close eye on their competitors.

There had been many instances that lawsuits almost destroyed a company’s reputation. Though, big-name brands always manage to recover quickly enough to redeem themselves to their market.

No Investors

It’s difficult to get people on board with your idea. A lot of startups have seen their demise due to a lack of investors. Data shows that 70% of tech startups fail in their 20th month after first raising finances. And due to a lack of financial aid, companies can’t sustain their own growth and inevitably go bankrupt. Lack of investors, of course, leads to insufficient funds.

Lack of Drive

It takes work to get a startup off the ground. And it takes even more effort to sustain its operation. A startup owner has to invest in the idea of the business succeeding. When it comes to building a business, you can’t do anything half-heartedly.  

YouCastr CEO Ariel Diaz shared in their post-mortem that they didn’t “love” their idea enough to really go after it. They couldn’t find the energy nor the heart to fully immerse themselves in the business. Hence, YouCastr saw an early end with its products.

The abovementioned items are just a few of the common startup failure reasons. Businesses usually see a combination of these and more.

How to prevent startup failure

Now that we’ve identified the common reasons for startup failure, it’s time to learn how to prevent them. Although problems are inevitable in business, there are ways to better prepare for them.

Here are some of the things you can do to prevent startup failure:

Business Contingency Plan

A contingency plan contains a course of actions and measures that an organization can take during unexpected events or situations. Its goal is to minimize the impact or damage that can significantly affect the organization’s reputation, financial stability, and ability to stay in business.

Business Continuity Plan

A business continuity plan (BCP) is considered as a type of emergency tool for business. It provides a list of procedures to streamline business continuity. This allows a startup to follow a list of structure procedures instead of recklessly dealing with each disruption. A BCP takes care of your business processes, assets, and more.

Risk Assessment

Risk assessment is the process of creating management initiatives based on the business’ environment or position. It’s an in-depth type of evaluation to determine where you are in your business and what are the potential risks that could threaten it. The main goal of risk assessment is to analyze the risks,  then eliminate them or at least minimize their level by increasing up the control measures as needed.

SWOT Analysis

A SWOT analysis helps you see your business from different perspectives. It allows you to see every angle of your business and helps discover its strengths and weaknesses. It also opens doors for new opportunities by giving a detailed list of items you can pursue to grow your business.  

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Along with your plans for preventing failure, you need to come up with ideas to succeed. And the best way to grow your startup is to build it on a solid foundation. You need the right guidance and resources to fulfill your business dreams.

Full Scale is an offshore software development company that offers a wide selection of services to help you launch and grow your startup. We make it easy and affordable for clients to grow their development team. Want to learn more? Contact us today! 

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