At the beginning of 2020, the number of searches for “how to start a business”, increased to 18,100 - the highest on record.
A recent survey of 1,000 adults in the U.K. backs up this trend with a staggering 65% of respondents planning to start their own business.
While start-ups are popping up left, right and centre, building a business to stand the test of time is another ballgame.
According to Review42, 90% of new start-ups fail and 20% will do so in their first year. Only 1 in 10 will survive past five years and only 1 in 10,000 will reach unicorn status, worth at least $1 billion.
While there is rarely one sole reason for a start-up’s failure these are some of the red flags keeping them from gaining the traction they’d hoped for.
1. No Market
The number one reason start-ups struggle to gain traction is because there is little to no market for the product or service they have created. How many new products that come onto the market solve people’s pain points or are needed? A report by CB Insights stated that tackling problems that are interesting to solve rather than those that serve a market need, was cited as the No. 1 reason for failure, noted in 42% of start-up postmortems.
Passion and the belief in what you are creating are fundamental to the success of any start-up. But these can also be a hindrance leading founders to see a “gap in the market” for their product, which is not always there.
Success has a lot to do with the timing being right. Launching a product before it’s ready can leave a negative impression on customers that is impossible to fix. When the market or technology has not developed as quickly as hoped for some products may fail because they are simply before their time.
When the product/market fit isn’t quite right many start-ups pivot, often dramatically changing their strategy to cater to a different market. While there are a lot of success stories where start-ups have pivoted many founders struggle to act decisively and adjust to the new circumstances. For example, YouTube successfully pivoted and went from starting as a video-based dating service to become the hugely popular video streaming platform it is today.
2. Lack of Resources
This one’s obvious: lack of capital resources.
Many start-ups lack the financial resources to position themselves in the market in the long term. There are times where they cannot raise the money they need because a competitor already has. Some start-ups may have funding, to begin with, but burn it hard fast or scale too quickly.
Likewise, it can be difficult to get the pricing right, so it covers costs but is still attractive to customers.
Some of the key issues include:
- High payroll costs
- Low profit margins
- Small but often recurring purchases
- Delayed or late payments from clients
- High expenses
3. Wrong Talent
According to Statista, 23% of start-ups fail because they don't have the right team in place. The first five hires are key and can make or break a business. If the team doesn’t work well together, doesn’t share a vision and is lacking the skills needed, the start-up won’t stand a chance either.
A diverse team with different skill sets and an understanding of the market is also critical to the success of a start-up.
Many start-up teams do not have a good understanding of the market they are operating in. Likewise, a lack of real long-term interest and passion for the market can also lead to failure.
4. Not Listening
It’s easy for start-ups to get tunnel vision. Some founders wind up building products for themselves and not the user. Losing sight of what the customer wants and needs accounts for 14% of start-up failures according to CB Insights.
Despite doing all the research and finding “the gap in the market”, the product isn’t always right. Many start-ups have made the mistake of planning their product or service completely out of the market instead of getting input and feedback from clients right from the start.
While most start-ups are built around a novel idea, the first-mover advantage can quickly fade. The market can become saturated with large companies and other start-ups quick to swoop in and capture the market you helped validate.
Unfortunately for some start-ups, these competitors can be longstanding companies with large budgets and the capacity to make the products cheaper and more effective, pricing them out of the market.