The first 12 months of the life of a startup is often referred to as the “valley of death.” Indeed, according to the Bureau of Labor and Statistics, 25 percent of startups close their doors within the first year.
Along my entrepreneurial journey, I learned from other people’s mistakes to try to make as few mistakes of my own as possible. So what can we learn from those that have so gallantly failed before us? What are some common reasons startups fail?
Reason 1: Failure of the Business Model
You need to be brutally honest with yourself when it comes to forecasting startup costs, revenue, and expenses in your business plan. This is the stage where you need to dial back the optimism. Over-optimism is a relentless startup serial killer.
Many entrepreneurs are too optimistic about how easy it will be to acquire customers. They make the assumption that because they make an awesome website, have a ground breaking product, or provide a service that people can’t live without, customers will fall over themselves to get in the door.
Ultimately, it becomes an expensive task to attract and win customers. For some doomed startups, the cost of acquiring the customer is actually higher than the lifetime value of that customer.
Reason 2: Running Out of Cash
Another major reason that startups fail is because they run out of cash. A key job of the entrepreneur is to understand how much cash you will need to carry the company to a milestone that can lead to either a successful financing or to a self-sustaining company with a positive cash flow. A rudimentary business plan, even if it is just to give yourself a roadmap, can go a long way toward avoiding this cause of failure.
Reason 3: Problems with Your Product
Most of the time, the first manufactured product that a startup brings to the marketplace is something that the market doesn’t know it needs. Henry Ford once said, “If I would have asked the public what they wanted, they would have said a faster horse.” In the best cases, it will take a few revisions to get the product and market to click.
For my first company, MD-Advantages, we submitted short surveys with every new modular medical cart system sold. With this we were able to gain crucial customer insights in how we can improve our product, from ergonomics to functionality. After all, the modular medical cart had never been done before, so we had no competitors to compare our product against.
In the worst cases, the product will be way off-base, and a complete rethink is required. This can be avoided by performing in-depth customer research prior to devoting your limited cash and precious time to an unproven product.
Reason 4: Not Knowing When to Change Directions
The good news is that your competitors, typically large companies, move like a cruise ship. When they make a business change and turn the wheel, they keep going straight for a long time before the ship finally starts to turn. As a small business, you are more like a Jet Ski; you turn the wheel and immediately you’re going in a new direction.
Unfortunately, some entrepreneurs continue to look down while marching in a failing direction. You need to keep your eyes open for new opportunities and be sensitive to how a particular product is or isn’t selling. This is accomplished by paying close attention to your metrics and setting up a real-time feedback loop with Google Analytics or similar software. You need to know when a pivot is required, while there is still enough cash in the bank and enough time to implement the changes.
Reason 5: No Passion
As an entrepreneur, it is vital you exude passion about your product and your company. You must love your startup well-enough to get through the good times and the bad. Doing so will help attract the best management team and the best investors.
Sometimes you may look or sound like a complete lunatic when getting overly excited about your business. Trust me, it’s infectious and begins to rub off on the people around you, with positive results. That passion will turn you into an Olympic hurdler, able to clear every obstacle in your lane in record time.
Wes O’Donnell is Professor of Marketing and Analytics at Baker College and the author of “RISE! The Veteran’s Field Manual for Starting Your Own Business & Conquering the Online Economy” available at Amazon. Mr. O’Donnell graduated from American Military University in 2010 with his MBA with a focus on IT Management. He is the founder and CEO of MD-Advantages Healthcare, founder of Modern Workspace Furniture, and founder of the veteran resource website WarriorLodge.com. Mr. O’Donnell served in both the U.S. Army Infantry and the U.S. Air Force.