The lifespan of the top 500 companies has reduced from 61 years to 18 years, according to research by S&P. Also, according to Forbes, 90% of the start-ups are likely to fail within the first five years of their operations. These are scary statistics for any entrepreneur. Thus, entrepreneurs prepare an exit strategy before they even get started knowing there’s more than a good chance they will fail.
Why do so many businesses fail? How do so many of these ‘great ideas’ bite the dust? There are a variety of reasons as to why start-ups fail. Market failure is the most common reason for the failure of start-ups. Renowned marketing author Brian Tracy says that analysing your market is very critical because it may be a great product, but at times there’s just no market to sell it.
A weak business model is also one of the core reasons for failure. Entrepreneurs are over-optimistic. They feel that a good product will attract a lot of customers when that’s far from the truth. Even though it may attract a few customers initially, the cost of acquisition of new customers is relatively high at the initial stages. There are cases where the COA is higher than the lifetime value the customer brings in the early stages of a business. Therefore, having a sturdy business model is essential.
Employees are the backbone of any business. There’s a common saying that a company is as good as the people who run it. In most cases, a weak or incompetent workforce lacks the ability to adapt to the stressful working environment of start-ups, and it leads to the start-up failing.
Running out of cash and product failure are the other reasons as to why start-ups fail. Start-ups fail to efficiently use the cash they raise to hit their goals and in turn, run out of money. Their failure to reach the goal makes it very difficult to raise funds again. Sometimes the product developed is weak, not a good fit for the market or is launched at the wrong time. A lousy product can quickly bring a start-up down. Forbes reported that the #1 reason why start-ups fail is that they get their product wrong. Also, 42% of the start-ups have cited “lack of a market need for their product” as the biggest reason for their failure.
The above reasons are why 90% of start-ups fail to cross the 5-year mark. What do the remaining 10% do differently? How do they have longer lifespans?
Again, like failure, even success has many reasons. The low odds of being successful suggest that each of these successful start-ups has pretty much got the following precisely right.
The first thing every successful start-up gets right is their product. They conduct sufficient market research and make the right product for the market. If start-ups get their product wrong, nothing can save their business.
The next crucial factor is the entrepreneur’s character. A good entrepreneur doesn’t overlook any aspect of a business and treats every problem with the same respect and care. Good entrepreneurs also understand that roles are far more organic in start-ups than they are in established companies and are ready to adapt if needed. They work on their business and not in their business.
Successful start-ups are also growth-focused and have streamlined business processes. That is the reason as to why they don’t run out of cash; they keep growing and bringing in money. Lastly, they have a tremendous and highly competent group of people running the business. The teams are versatile and have a positive mindset which helps them recover from tough situations which are quite frequent in start-up environments.
Thus, to be a successful start-up, entrepreneurs must first focus on developing the right product for the market. They must have an optimistic yet realistic mindset, work with the right people and be growth centred. Statistics show that it is easier said than done. A 90% chance of failure could look daunting. But adopting the approaches mentioned above and can make the journey to the 10%, that much easier.