Why Do Startup Companies Fail?

If you’re thinking about launching a startup company for your products or services this year; it might be a good idea to take a step back and consider why so many businesses fail in the first 3 years of their lives (it’s estimated that 90% of businesses don’t make it to the end of their first year of trading) so that you can avoid making some of the more common mistakes:

Do You Have a Market?

It doesn’t matter how good you think your product is. You must have a group of potential customers who agree and who will be willing to pay for that product. Sir Clive Sinclair got his startup for the Spectrum computer line superbly right; cheap home computers than anyone could use had a near unlimited potential (and still does today) but then his electric scooter – the C5 – proved that you could build a product with no market at all.

Your market should be current (don’t build for a market that will exist in 5 years), it should be big enough to make a profit (not all of the market will buy from you – assume that 0.5% will and ask if there’s enough money to run your business from that).

Have You Defined Your Business Model?

You need a business model that works in order to succeed. Now there are many complicated books on business models but the keys are to discover whether:

• You can acquire a customer for less money than they will return in their lifetime of dealing with you. (Note: Customer lifetime may be a one-off event or a recurring event). So if it costs $12 in marketing for each customer to spend $10 on products; your business model is going to send you broke.
• You can ensure that you can get the customer to pay off their acquisition cost within 12 months of their first purchase. You can’t wait forever to get your investment back; unless your backers have deep pockets and incredible understanding – you need to make profits sooner rather than later.

Have You Got the Right Management Team?

This is incredibly tough to get right. You need the right people who can take your strategy, develop it and execute it. They also need to be able to hire the right teams to take this farther. Try not to hire friends and family (it may be appealing but if they’re not 100% committed to your vision – they’re going to drag you down) and concentrate on hiring proven quantities; ideally they should have startup experience because there’s a big difference between getting something started and maintaining it.

Is the Product Right?

Can you manufacture and distribute a competitive product? There’s no point entering the budget camera market, for example, if your point and click product is going to cost $3,000. There’s no point in launching a software application that crashes hourly when your competitor has a smooth user experience and has had for years. You may need to constantly revisit your product from inception to delivery to ensure that it’s the right product for the market.

Header Image: Author/Copyright holder: Helsenberg Media. Copyright terms and licence: CC BY 2.0