You’ve probably heard of the chilling stat: 8 in every 10 new businesses fail.
That was back in 2013.
It’s 2019, and the numbers are still uninspiring. Sure, the market is a bit friendlier to startups now, but still about half of all new businesses close shop within five years.
This evokes the question: Why are there so many failing businesses?
Whether you’re an aspiring entrepreneur looking to start a first business or a seasoned entrepreneur with a thriving enterprise, learning from the mistakes of failed businesses can make a big difference.
In this article, we’re diving into the reasons why so many businesses fail.
Poor Market Research
The most successful businesses are those offering products and services that solve a customer problem. To identify these problems and customize products or services accordingly, the companies must conduct thorough market research.
Unfortunately, a good number of new business fail to research the market. Without an intricate understanding of what the customer wants, these businesses are unable to offer satisfactory products.
If you’re looking to start a new business, seek to understand the market first. Don’t pump lots of capital into creating a product or service that won’t have a strong demand in the market.
Poor Cash Flow
Of the businesses that fail, a whopping 82 percent fail because of poor cash flow and lack of capital management expertise.
It’s easy to see why this is the case.
When starting a business, you need startup capital. A common mistake newbie entrepreneurs make is starting up without adequate capital. Most of them assume that their businesses will start turning a profit soon after opening. This, in most cases, turns out to be a fatal assumption.
You see, it can take a business several months or even years before it breaks even and pulls in good profits.
Case in point? Uber, which is about a decade old, is yet to be profitable. Had the founders started out without sufficient capital, there’s no doubt the company would be long dead by now.
Bad Leadership
Running a business involves a lot of decision-making right from day one. For instance, you have to decide on the business structure, marketing strategy, asset acquisition, and whatnot. Then as the company grows, you have to build and lead a team of employees.
If your leadership skills are lacking, you will certainly make bad decisions and put the business in jeopardy.
Indeed, bad leadership is one of the major reasons so many businesses fail. Most founders want to run their companies even when they are not the best-placed person to take the company forward. They forget that it’s one thing to be a savvy entrepreneur and it’s another to be a good leader.
Travis Kalanick is an example of how bad leadership can threaten a company’s operations. Yes, he did a stellar job steering Uber from infancy into a multi-billion dollar startup, but bad leadership allowed a negative workplace culture to thrive. The company didn’t fail, but he had to pay the ultimate price, which is resigning from his position as CEO.
As a founder, it’s important to examine your leadership skills. If you’re not a capable leader, consider taking leadership and management courses. Here are more details about the programs you can pursue to improve your leadership competence.
Stiff Competition
In business, one thing is certain: competition.
While market competition can drive you to create better products and offer quality services, it can also make it difficult for your business to thrive. This is especially common for small businesses that have to play in the same market with huge corporations.
When competing with a large company, there’s little a small business can do to outgun it. A large company can easily lower its product pricing in a bid to keep its customers and attract new ones. A small business has no such luxury.
So, what can you do about market competition?
Of course, the best way to beat competitor is to not only offer a quality product or service, but also one that solves the customer’s problem in the most effective manner.
Another way is to avoid the market altogether. If an industry is overly competitive, there’s no need starting a small business that might not survive. You’ll only be pouring your capital down the drain.
Founder/Partner Wrangles
The numbers say startups with more than one founder have a greater chance of succeeding. They raise 30 percent more money and have almost 3X user growth.
Well, numbers don’t lie.
But having a co-founder or partner also enhances your chances of running into wrangles that can bring the company to its knees. Perhaps the co-founder wants the company to go in another strategic direction or they want to be the CEO – the same position you want.
Regardless of the specific situation, wrangles and in-fighting among founders is another major reason many businesses fail.
Cyber attacks
Did you know 43 percent of all cyber attacks target small businesses? Or that many of the small businesses that experience a cyber attack close shop soon after?
A cyber attack exposes your business to several risks. If the hackers make away with customer data, for instance, you could face a multi-million lawsuit for failing to protect confidential info. If the suit is successful, declaring bankruptcy becomes your only option.
Although hackers are getting smarter as technology advances, taking measures, such as hiring cyber protection experts, can make a massive difference.
Learn from the Mistakes of Failing Businesses
Entrepreneurship is all about taking risks, but when these risks result in so many failing businesses, you’ve to take a step back and find out the causes. Lucky for you, we have fleshed out the main reasons behind the rising business failures in the United States.
Learn from their mistakes, and keep reading our blog for more business insights.
