5 common reasons why most startups fail (2022) and how to avoid them

As you step into your entrepreneurial journey, one of the key challenges is understanding why some startups succeed and others fail. Whether you’re an entrepreneur starting out your new business or has been an entrepreneur for a few years, it is vital to be aware of the  top reasons why startups fail.

According to Investopedia, as of 2021, 10% of the startups fail in the first year, 50% within five years, and 65% within 10 years. Research has also shown that the failure rate for new startups is currently 90%. while 10% of new businesses don’t survive the first year. 

And you don’t want to be one of them, do you? 

CB Insights has listed top 12 common reasons of startups failure and in this blog you will read about 5 of the foundational reasons that you must avoid when you're getting started. If you understand these common reasons for the downfall of startup businesses and learn how to pivot, you can achieve success and make your startup dream a reality. 

Table of content

01. Startup without a profitable idea

02. Inadequate Planning

03. Ineffective Startup Business Model

04. Unskilled Team 

05. Insufficient Funds 

06. Key Takeaways

Take a moment to  read about what you should avoid and how, what you should do differently to hit your startup goal. 

Let’s dive right in!

01. Startup without a profitable idea

Have you ever wondered about the possibilities of your brilliant idea may not be that useful to others? 

One of the reasons why most of the startups fail is when there is no compelling reason for the buyer to purchase the product. Or being ahead of your time in the market, would also mean it will be a struggle to connect with the buyer. 

 

Before you begin your entrepreneurial journey, you should consider whether your startup idea is truly worth a million dollars.

But how do you find the best startup idea ? To figure out whether your startup actually can grow and benefit your audience, consider these critical questions:

Target audience

• Who are your intended audience(s)?

• Is your startup idea addressing a need in your target market?

• Will your product or service be useful to your target audience?

• Most importantly, is your target audience large enough for your product launch to be financially viable?

Product

• What is your product's impact?

• What benefits will your final product provide to its users?

• What are the flaws in your concept that you will need to address before moving forward with product development?

• Is your product in demand in a specific market segment?

• What are the challenges you may encounter during product product and process development?

Given enough time and resources, do you think your startup can scale? Once you are certain that your idea is worthwhile, mentally prepare yourself to embark on a rewarding startup journey.

Related: Why knowing your audience matters

 02. Inadequate Planning

The reason why 90% of startups fail is due to a lack of clarity in why, what, how they plan to take things forward. If you want your startup to succeed, you'll need a business plan. 

A business plan is basically a documented version of a company's core activities, business objectives, and strategies that the company intends to implement in order to meet its targets and goals. 

And the first important thing to look into when starting a business is a business plan. But how can a proper business plan benefit your business? 

A business plan can help you clearly define your objectives and set realistic goals for your business. When you know your business purpose, you can communicate effectively to your team members. For a startup, it is important to inform your entire team to understand your mission and vision, in order to work as a cohesive unit toward a common objective. 

With a business plan, you can have a clear roadmap for  your business and be in control of business processes, such as budgeting and resource allocation. 

During the planning process, you will be successful in establishing guidelines and key performance indicators for your startup. You will also find it easier to identify and mitigate risks.

But what should you include in your business plan? 

Consider these : 
 

• What are your company's goals?

• What are your company's primary selling points?

• Is your product completely functional?

• How can you help businesses?

• How can you mitigate business risks?

• How long will it take you to introduce your product?

• What sales and marketing strategies do you plan to enforce?

• What are your financial needs?

• What are your financial projections for your company?

• When will you be able to turn your business idea into a financially viable product?

When all of these and other related questions are addressed in your business plan, you can identify how your startup can scale and be in track of your startup goals and objectives. Maintaining your business plan in a layout that can be presented to investors during elevator pitches is also a good idea.

03. Ineffective Business Model

Can a business model impact the success of your startup? Well, one of the common reasons why many startups fail also depends on the business model. 

When it comes to attracting investors for your startup, your business model is crucial. Since investors are ultimately interested in the profits that your startup is expected to make, the correct business model can take you places you want. 

A business model is a startup's primary revenue-generating strategy that highlights how well the company intends to generate profits. The wrong business model may eventually lead to financial issues.

Moreover, your business model can be your guide in organizing business operations and the development of revenue generation strategies. With an effective, ideal business model, you can identify how to develop the right use of your resources to maximize your income and minimize your expenses.  

When considering your business model, remember to keep in mind: 

• Your goal 

• Your target audience

• Your customers' needs

• Your marketing strategy 

• sales projections for your product

• Competition faring

• Your unique selling point

• Various revenue streams available to you

• Your startup's strengths that you can leverage in your chosen market

Take a look at this great business model from UBER which includes all the essential components such as customer evaluation, finances, key activities  and so on. 

At the same time, it is critical to be aware of what is important in your business model. And to get the right answer, ask yourself: 

01. Is it possible to develop a scalable method of attracting customers?

02. If so, can you monetize those clients at a much higher rate than your cost of acquisition?

04. Unskilled Team 

According to Harvard Business Review even a set of stakeholders, including employees, strategic partners, and investors, all can play a role in a venture’s downfall. And  studies have shown that 25% of the startups fail due to an incapable team. 

Your success indeed relies upon  the skills and attitudes of your team members. For example, if you are at the same position when you started even after 3-4 years, there should be a change in the strategies that’s coming from your team. Moreover, if you think about why your startup has been lacking in growth, it’s time for a good change. 

If your clients are your startup's heart, your core team is its backbone. 

But what should you look for in a team that’s gonna take your business to the top?

Active belief in your goals and  creativity. If you are managing a team of 10-15 people, do they all have a unique role? Or have you ever considered whether they actually contribute to the success of your startup. 

Here’s the thing; Your team has to have the same passion, drive and ambition as you. If not, they will not be actively contributing to the growth or success you wish. And it is not just an active contribution from a single person, it is also about active collaboration coming from your team together. 

A team that stays together, slays together

If your team lacks creativity, that is another issue you must address if you want to grow your startup. A team that’s incompetent would be creating a product that no one would want. And a  management who cares little about the process, ideation, validation, execution is where you start the real analysis.  

When you’re hiring again, think about the gaps and flaws in your startup that needs attention. And make sure to keep them in mind and hire individuals with excellent hard skills, soft skills and human skills that are essential for the startup success. And a project management tool can definitely help you and your team to be always updated on the big picture and also see ongoing projects, future ideas and daily tasks.

Related : Startup Project Management 2022 

05. Insufficient Funds 

Let’s assume you got a profitable idea, excellent business plan and an effective business model, but do you have the funds to get things started and continue? Not to say the amount of bills and costs that you have to be burdened with being the main lead. Having the sufficient funds that could pay employees monthly salary, advertising costs, legal fees, and more costs can be stressful.

But how can you find funds?

• Start with Bootstrapping.

Bootstrapping is when you keep scraping together any personal funds you can find. This could be from your savings account, credit cards, and any home equity lines of credit you may have.

You won't have large loans and monthly payments to restrict your expenses, especially if you run into difficulties along the way. However, if you want to quickly scale your business, this may not be the ideal option for your business. Because you can never rely on bootstrapping till your business reaches its success.  

• Friends and Family

Asking your closest family members and family members may not sound so good but at least asking never hurts. They can also contribute in a small way to your business if you share a solid, hardcore business plan. So you just have to go for it!

• Angel investors

For tech startups, angel investors are the best choice. These angel investors are willing to invest in at least $10,000 to a few million dollars for promising companies. To find angels, ask other entrepreneurs in your network, or check AngelList, a website that helps entrepreneurs make connections with interested investors. So far, the site has helped more than 1,000 start-ups get funded

Related: 5 step guide to pitching your startup to investors

Key Takeaways

As entrepreneurs, building and growing a startup is never an easy journey. But understanding how your startup could fail is also a means of recognizing what you should do to not fail. So first, start with a solid idea that aligns with your market and consumers, followed by a business plan that highlights why, what, how of your business. 

Next, figure out the fundings, the perfect business model that suits your company, the team and the goals.  Hire an A-team that believes in your vision and actively contributes to the startup growth with skills and creativity. And make sure to develop a product that is actually of use to your target audience. Moreover, it’s always great to be passionate about what you do and adapt a solution oriented, forward thinking mindset. 

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