5 reasons why startups fail (and how to avoid them)

If you run a quick Google search on why startups fail, the screen lights up. After hours of reading, there are many really nicely written reasons why startups fail that touch all number of topics. However, we don’t just want to know why a startup fails, we also need to know what to do to make sure that doesn’t happen to us. Here are some red flags you should be looking for and how to avoid them, explains business strategist, Alan Manly.

1. Running out of cash

The most obvious reason is not a startup failure per se, but a business failure symptom. The company runs out of cash. This issue is not unique to startups. Big companies also collapse and the final stage is running out of cash. Kodak, which was founded in 1892, filed for bankruptcy in 2012. Certainly not a startup, but it ran out of cash.

Cash is king and the minute that the management fails to respect cash, the ghost that is bankruptcy is awakened.

Startups are a curious arrangement where the one entity, be it a person or a group of people, are required to be braver than average, boldly standing in public spouting a great new idea with an ego nothing can dent. But when the show is over, they are also required to be strong enough to be modest and miserly with every dollar, more in the model of the hero cash manager known as Scrooge.

All costs in a startup must be measured on how the expense will give a return on investment quickly in a bid to preserve cash. Startups are a short-term business with the need for near-immediate returns or the cash will run out. Big companies have the luxury of deeper pockets to plan and invest longer term.

2. Mates

Who hasn’t had the experience of having a good mate that desires to branch out on their own? The danger is when these characters decide that not only are they a mate, but they could also be perfect business associates.

Two heads are better than one, as said by John Heywood in 1546. The problem is that two heads work well for developing ideas – but startups are not ideas. The startup team falls apart often when equals feel less equal. Both heads as it were, feel that each and every decision should be agreed upon in a joint manner.

This is extremely difficult with any situation and near impossible with more than one driven individual. The best plan of attack is to build a team with you as the clear leader. If that is not an option offered to you, this may not be the startup for you.

Or if there is a strong leader, make them the leader. And let everyone know the lay of the land.

3. Lack of research

Startup entrepreneurs are always in a hurry. It is part of their nature to have a great new idea and run with it. That is the buzz of being an entrepreneur. The dreaded headache that can come from this rush to market is the result of a lack of research.

A startup entrepreneur has to have the flair of show biz and the insatiable curiosity of a nerd. Again, not a common combination.

To avoid this issue, never stop checking the market, read business magazines, go to trade functions, find and interview the competition’s customers. Keep asking the right questions.

4. Love what you do!

Loving what you do is a great feeling. Why not do it for a living and work for yourself?

There is more to running a business than the fun bits. If you are working in a company that has more than ten staff, there is most likely a structure that supports what you love doing and doing well. Once you set up a startup, you are now the jack of all trades and the job that you love becomes subservient to all the boring admin tasks that you chose not to have a career in. Let alone worry about cash flow.

Sometimes it appears that the startup entrepreneur seeks recognition for their talents and establishes a startup as a platform for that recognition. Sadly, startups are hard-core businesses. It’s often said that business is war. If you are seeking talent recognition it may be wise to reconsider if a startup is for you.  

5. Work-life balance

The trend is to declare that you are not a slave and have the right to a work-life balance. Exactly true.

For a potential startup entrepreneur, it would be very wise to consider their personal lifestyle needs before they progress to setting up a business. The statistics show that divorce among entrepreneurs ranges between 43 and 48 per cent. It’s even higher among dual-entrepreneurial marriages, as both are intensely focused on managing their respective businesses.

As an entrepreneur, I declare that my life involves work and work involves my life. To me as an entrepreneur, they are one and the same.

As always in business and relationships, it is better to be honest with yourself and everyone else.

Remember that there is no rush. As Richard Branson said, “Business opportunities are like buses, there’s always another one coming”.

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