Four Reasons Why Businesses Fail

Written By: Mo Elhammady @the_business_lounge_ @moelhammdy

Photo: www.Profitkoach.com.au

Running a business is very risky. As a matter of fact, it’s estimated that roughly 49% of businesses fail within their first five years and approximately 30% of those don’t even make it through the first two years. Certain industries are particularly risky and have even higher failure rates. Take restaurants for example, about 61% of independent restaurants don’t make it through their first three years. Another statistic you might find surprising is the failure rate for technology startups; almost three times higher than that of all other businesses.

Now I know these statistics don’t sound encouraging to new entrepreneurs, but I truly believe chance plays a small role in the fate of a business. There are countless reasons why a business might fail, but generally speaking, there are four fundamental reasons why this happens to them.

· 42% of businesses have no market for their product or service.

· 14% of businesses ignore their customers.

· 23% of businesses don’t have the right team in place.

· 29% of businesses run out of cash in their first year of operating.

Let’s dive into each reason with a little more detail and see what you can do to avoid these very serious pitfalls.

THERE IS NO MARKET FOR THEIR PRODUCT OR SERVICE

When you build a product or service that’s exactly aligned with what your target customers’ need and want, you have what’s called product/market fit. If you have a product or service that’s wanted in your target market, all you have left to do is figure out the best way to present it to them, and how to retain them once they’re customers. However, if you don’t have a product/market fit, and you develop a product or service that nobody wants, your business will ultimately fail.

As you can see in the Venn Diagram below, you need the market opportunity (a hole or gap in the market), a service or product you can build, and the demand for it.

Photo: www.startupdevkit.com

Otherwise, why start if you don’t meet these requirements? It makes no sense. We all have ideas about different things in life, but that doesn’t necessarily mean we have to act on them.

Instead of building a startup based on an idea without knowing whether it’s good or not, you should go through the following process of idea validation:

1- Build a customer profile or multiple customer profiles.

2- Do your market research to gain insight into the market size, statistical segments, and search for any gaps in the market to use as unique selling propositions.

3- Perform a thorough competitive analysis.

4- Develop a marketing strategy that includes and shows your user/customer acquisition channels and/or distribution networks.

5- Create a business model that will indicate how the company provides value and solves a problem its target users face and how it will be fiscally sustainable.

6- Collect feedback from people who are in your target market. When asking them, tell them that you noticed they were in xyz space and that you respect their opinion and would like to get some feedback from them about an idea. If they say yes, then ask them for their honest opinion if your product/service idea is something they would use and buy. Why or why not?

Doing this process of idea validation is absolutely vital for every startup to achieve product/market fit.

THEY IGNORE THEIR CUSTOMERS

When you’re starting your small business, you don’t only need to know what you’re selling, but you also need to know to whom you’re selling it to. After all, getting to know your target audience is half the work. The other half is catering to your customers’ specific needs.

The small business survival rate is an indication that companies who ignore customer’s problems usually have a higher risk of failing. This usually overlaps with poor marketing skills. At the end of the day, good marketing means adapting to the user-focused world we live in today. So make sure you listen to your customers.

Sir Richard Branson said it best, “Success comes from listening to your customers.”

You really need to understand what your customers want, and more importantly you need to hear what they have to say when they have a complaint or bad experience dealing with your company. This is the best feedback you can get. It’s honest, it’s raw, and it’s an opportunity for you to resolve that problem and retain that customer for life. Not only will that customer keep coming back, but more likely than not they’ll share their experience with others they know, and that in turn should bring you more business. At the very least, it builds your brand image the way you want it to in the customer’s eyes.

THEY DON’T HAVE THE RIGHT TEAM IN PLACE

A very common problem that causes startups to fail is a poor management team. A good management team will know and be smart enough to avoid the two earlier points we discussed. Weak management teams make mistakes in many areas:

- They’re often weak on strategy. More often than not, they build a product no one wants to buy. This usually happens because the team failed to do the required work to validate the idea before and during development. Unfortunately, this usually leads to sub-par market strategies.

- They’re usually poor on execution, which usually leads to the product not being built correctly or on time. Obviously, their go-to market execution will be poorly implemented.

- They build weak teams below them. In business, there’s the proven saying: A players hire A players, and B players only get to hire C players (because B players don’t want to work for other B players). The problem with this is the rest of the company will end up weak, and poor execution will be rife.

THEY RUN OUT OF CASH IN THEIR FIRST YEAR OF OPERATION

The fourth and last major reason startups fail is because they run out of cash. It’s the CEO’s or business owner’s job to know how much cash is left and whether or not it will carry the company to that next milestone leading to successful financing, or becoming cash flow positive. When in doubt, stay conservative. Having that “lean and mean” mindset, and the concept of a minimum viable budget is what will get you through the tough times that are sure to come when things get tight. You need a lean operating budget to get you through those tough times, and those tough times will surely happen. Please don’t think that your business is the one exception to this unwritten rule. Make sure to expect and prepare for them. That’s the trick with budgeting – to continue to be frugal and careful with your money, even when times are good. Think about it, if you can’t be frugal and save money when you’re going through good times, it’s highly unlikely you’ll be able to do it when business gets tough.

FINAL FOOD FOR THOUGHT

Even if a business is doing well on most fronts, one major problem can lead to its demise or a combination of different minor problems can end up being too much to handle for the company. It’s true that it’s difficult to be one of the few that survives. It’s going to take capable leadership, adequate financing, effective business practices, well-defined goals, and more than a little bit of luck.