Why do startups fail

“Eight of out 10 businesses fail within the first 18 months” was the myth spread by Forbes in 2013.

Don’t let this journalistic marble scare you. It’s not that bad. Jet, the real numbers still show you have to do your homework. So lets start right now:

Half of new businesses fail during the first five years, of which 30% in the first two years, … seem to be the accepted rough numbers across multiple institutions and media. For me, that is still a lot of failure waiting to happen. It’s what I want to help you with and what I have done for so many years. It’s what my advisory firm does.

Combining my experience with a lot of research, I compiled the most serious causes that can shatter your chances of success:

1. Lack of Brand Platform and Strategy.

The Brand Platform is where it all starts. It sets the values on which the whole business will operate: why you do it, who’s problems you are going to solve and how you approach everything. Brand building, positioning, value proposition, target audience, corporate identity and communications are all materializations of the Brand Platform. Getting this wrong is like starting in the wrong direction.

As a side effect, and if done right, the Brand Platform can serve as proof of concept because it forces you to know your customers and your market extremely well. Therefore, it significantly reduces the risk of failure.

I’ll only touch briefly on positioning here although it is a huge strategy decision that can lift or bury your business pretty easy.

Positioning is the art of putting yourself in that sweet spot where your product or service is unique enough to largely cut down on competition while still maintaining a niche rich enough to sustain your business. You don’t want to be a commodity fighting for a place in price comparison charts and you don’t want to be so focused that only a handful people will buy your products. In this article I touch a bit on that sweet spot: Competition Audit.

For all the reasons above, you need to settle on your Brand Platform upfront. Unfortunately, too many startups ignore this part completely. It’s the perfect setup for short-term failure.

2. Wrong market evaluation / business model.

Or in other words “Presumption is the mother of all fuck-ups”.

It’s not enough to establish the core values through your Brand Platform and to understand your audience’s needs. You also want to find out if it can sustain your business. Can your customers afford it and is are they willing to buy? It’s a matter of numbers, not suppositions.

There is a lot of other stuff you could get wrong here: number of customers that really need your product, their capabilities, scalability, competition in your niche, pricing of your products and timing just to name the big ones.

Another set of presumptions often made when evaluating the market is about customer acquisition. How easy it is to acquire new customers and how much this action will cost, needs to face the total value the customer is returning.

Technically speaking, that is the CAC/LTV rule (cost of acquiring the customer/lifetime value of customer) and it’s pretty evident: CAC needs to be less than LTV for a profitable business model.

You also wouldn’t want to ignore the time needed to recover the cost of acquiring your customers. Put that against your capital and you already have a better chance to estimate how the few next years will look like.

3. Product problems.

You can make the best market evaluation and identify the best product or service to satisfy the need of your customers, but you also have to deliver. If your product doesn’t meet the needs of your customers, if it is faulty, badly supported or any other product related issue, you can’t be expecting a lot of success are you?

If you are smart and can dig up the resources, it’s a great practice to test your product in advance at a smaller scale, collect the reviews and improve. This is not always possible but correcting mistakes in a quick manner is essential. You could even win a few points in your customer’s eyes if executed properly.

If you did a good job setting the values of your company and understanding what your customers expect, your product should be fine. Then, it’s only a mater of fine-tuning.

4. Deficient management.

It all boils down to leadership in my eyes. Being a good leader means having happy employees. Happy employees make happy customers. It’s that simple.

Jet I see the opposite all the time: miserable company culture, inadequate payment, lack of communication, stress, hate and unfair competition among employees. Nothing can thrive in such an environment.

Leadership is something you should figure out if you aspire to be an entrepreneur. I give you a hint: it’s a lot about compassion. Otherwise, you should be smart enough to step aside and hire someone that does it for you.

The more technical side of management is how well organized you are and how efficient you are at administering the company’s resources. Time management belongs here, too. Management is something you can learn. If that is not your thing, again, find someone who can.

It’s a matter of self awareness. Don’t let your own ego destroy your business.

5. Poor Communication.

You should have figured out what you need to communicate in the first phase, as you built the Brand Platform. But the values of your Brand only give direction and set the tone, the voice of your communication. How efficient the message can be delivered, is a matter of technique and tactics.

Firstly, you need to understand that attention is an asset. Where is the attention of your customer? Is it on social media, on television or on billboards? That’s where you need to be. Even if you don’t like it. And if you don’t show up in those places, how would your audience even know you exist?

By the way, a website, even a great one, is not going to be enough for most businesses in 2020 and the trend shows it’s getting worse. That shouldn’t mean, you don’t need a website or that it doesn’t have to be built well. It is still one of the most important touchpoints for any business, not only for startups. One that should communicate the values of your company.

6. Displeasing Touchpoints.

Touchpoints actually belong to communication but the situations where they are mismanaged and where customers are treated inappropriately are so common, that I want to hammer it separately.

Take support centers and guarantees for example. Those are touchpoints where your customer comes “begging” for help and is so often let down. If you want to stay in business, you can’t afford the bad experiences your customers have to go through. You will lose them for good. And what is worse, they will also tell others about it.

Now, imagine the opposite: delivering such a great experience, that your customers will convince others to join.

A more abstract approach to touchpoints and therefore to communication, is to look at every business-client interaction as a good opportunity to communicate your values. It’s those small things, but they add up to your brand.

Take your Logo for example. Does it look amateurish? Is it communicating your values and can be easily remembered or does it communicate you don’t care?

How about packaging? Did you just consider price or did you invest some thought on how it will be opened. Did your stupid molded plastic packaging just cut my finger?!? Fuck you, cheep company!

7. Persistence and patience.

If you figured the previous points out and business is still slow, it’s usually a matter of persistence and patience.

To a certain degree, you could beat time with a beefy marketing budget and by brilliantly covering all the above points. Especially communication. That would move the needle faster. Otherwise, be prepared to invest some time and perseverance.

On the other hand, business doesn’t have a finish line. You can’t arrive at the “I’m the best” finish line and end the race. There will always be someone assessing your weaknesses trying to surpass you. This is a race that never ends and you constantly need to improve in order to stay ahead. Then, you just need to outlast everyone.

There can be other causes that could contribute to a business failure. Some, you could say are industry specific. Sometimes luck plays a role, although, you should to be prepared for at least some unfortunate situations.

Other than luck, it’s all in your hands. You can’t blame others for failing. It’s just knowledge and the way you apply it. I guarantee you: if you score high on all the points above, you are going to be in business for a long time.