Why Do Startups Fail in a Very First Year? | Top 7 Reasons

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Starting a business is a lot harder than most of us think. It is definitely not everyone’s cup of tea. It is a very rare occasion when the business flows very conveniently without putting much effort. But the question arises, why do startups fail despite trying so hard. And the statistics show that the number isn’t less. The reason behind this failure leads us to search more regarding the startups.

How Many Startups Don’t Survive?

According to SBA (Small Business Administration), businesses with less than 500 employees are considered small businesses. This means that various businesses are small even though they seem large to us. In 2017, these small businesses make up 47.1% of the working population in the U.S., so the rate of growth is important for the U.S. economy.

At present U.S. has around 31.7 million small businesses which contribute to 99% of all U.S. businesses. Every month new businesses start but the rate of its failure has also grown. In 2019, 22% of the businesses failed in the first year itself and the statistics rose to 70% in their 10th year.

If we consider the number of businesses that startup, the situation is worrisome that why do such a high percentage of businesses fail?

Let’s discuss in depth the reason behind the failure of startups:

1. Market Problems

The major reason behind the startup failure is that the problem of being very little or no space for the product or service which they have introduced. Here are certain common problems which are observed:

  • There is no compelling reason for the buyer to purchase the specific product. You have to understand the need for a product that is “must-have” for people rather than “can have according to the mood”.
  • “Timing is Everything”, it is rightly said. If the market timing is wrong, you won’t be able to succeed. Your solution can be the best but people may not be ready for that type of solution at that particular time.
  • The market size of the people who need your solution is not big enough. The funds which are invested are not enough.

2. Business Model Failure

After thorough research work, we realize that the entrepreneurs think it to be an easy task to acquire clients. They are very optimistic about acquiring customers, but what they don’t realize is the hardships faced in doing so. The assumption which entrepreneurs have in their minds is that they can build a website, product, or service that will make people want their business, but after a while, it becomes cumbersome to make the client interested in their product. The business owners do not calculate the realistic cost of the customer acquisition.

3. Money Management

One of the major reasons why do startups fail is that they run out of cash. The key job of the entrepreneur is to seek whether they have sufficient funds or they need to carry the company to a milestone where they can seek successful financing.

The pattern of valuations of a startup doesn’t change in a linear pattern, just because you have spent a year since you raised your business around doesn’t mean that your business is worth more money. To reach an increase in the valuation of money, one must achieve the key milestones required.

If the owner is not able to manage the finances, he/she may run out of money. Money running out also symbolizes the inability to obtain financing or sustaining a business in the early days until a business can generate profits.

Also Read: 6 Biggest Mistakes That Most Business Owners Make as a First-Time Startup Founder

4. Lack of Research

You need to know the problems of the customers, and their efficient solution as well. It is very essential to know what the customers want. Many entrepreneurs think that they provide great service or products but they fail to understand that nobody wants that service or product. By doing proper research work, you can find out how to meet your potential customers.

5. Bad Partnership

When the business is in its early days, you need some helping hand at every stage. So, you seek a business partner who is an expert in some area that is not your specialization. Your ideology might not match with each other and without a clear resolution, the internal strife starts. You work harder and your partner works less, and then your partner thinks, he is doing all the work. Ultimately the business dissolves due to the partnership. You can avoid most of the conflicts by having a good business plan.

6. Product/Service Problems

Another reason for the companies to fail is because the product itself fails. It can be due to a lack of fulfillment of the market fit. Most of the time, the product which a startup brings to the market doesn’t fit the market. In most cases, people rethink their products. If this happens, it is very clear that they need to do complete research regarding the products and services.

7. Bad Marketing

People consider money waste in spending on marketing but the hard truth is that your product is best sold with effective marketing skills. Marketing surely costs money but if it is done right, it can extract huge profits. Bad marketing can lead to the failure of the product as well. Instead of fumbling over the marketing campaign, you should keep this aspect in top priorities.

Conclusion

The hard reality is 8 out of 10 businesses fail. The number signifies that many things need to be corrected before the business succeeds. Fortunately, you can also be among the first 20% who can survive with few profits in the first year. You just need to follow certain tips like you need to test your idea, you need to complete your research work, you need to make sure whether you are ready for this or not, before jumping solely into a business. And for that, here comes the role of a business consultancy firm. A genuine consultancy firm can guide you with your business plan and helps you in achieving your business goals effectively.

Read Next: Top 5 Profitable Businesses to Start With Almost Zero Investment

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Vishakha Puniyani
Articles: 46

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