Top five reasons why start-ups fail

Entrepreneurs start businesses for a variety of reasons. But in truth there are very few for whom money isn't a primary concern.

So when one of those start-ups sadly fails you would expect money to be the primary reason almost every time. But although nothing will kill a promising new company quicker than a lack of funding, other issues of a non-financial nature can be equally damaging.

When more than one entrepreneur is at the helm there are often terminal differences of opinion that stymie even the best ideas. On other occasions the failure can be put down to pure bad luck.

So in the sprit of preventing this happening to you, here are just five of the plethora of reasons that start-ups fail.

1. Artistic differences

The catch-all term that is used to explain the demise of every rock band in history; ignoring the extreme physical violence and substance abuse that is invariably involved.

But for businesses in their early days this can be a real problem. When John Rampton co-founded he took care of the financials while his co-founder was in charge of the technical side.

In less than a month the property selling website had more than 80,000 customers. But disagreements over funding, strategy, growth strategies – well everything really – soon came to the surface.

Neither party was willing to give an inch and it soon became clear the project was doomed. The business was sold for a pittance shortly afterwards.

>Related: Five business giants who failed first time around

So if a business is founded by more than one person it’s crucial that their relationship is not going to hit a brick wall in the future. While it’s impossible to roadmap any future problems, a little knowledge of each other’s “deal-breakers” could go a long way. Otherwise you could end up wasting a lot of time, effort and resources for precisely no reward.

2. Time and punishment

Some businesses answer such a fundamental need that you can’t believe they haven’t existed before. However, it’s perfectly possible that something similar did exist before, but simply couldn’t survive because of poor timing.

It may turn out that Google Glass is an example of a product that may have been released before its time and subsequently failed. But what of whole business that suffer the same fate?

One prime example is Webvan; the online shopping delivery service folded in 2001 after a disastrous five years. Anyone who’s ordered shopping online now (pretty much everyone right?) will be shocked by the failure of something that fulfils such a basic desire.

That’s not to say it wasn’t used at all. It was moderately popular, but spending $1 billion on delivery trucks and infrastructure suggests the owners hadn’t really done their sums.

You might have the best idea in history, but if those less brilliant than yourselves are not ready to accept it you may struggle. There are products, like Henry Ford’s Model T car, that drag an unwilling public along with them.

But more often than not people will just look at you like you’re a bit mad. Assessing which scenario is most likely is probably not a bad idea before you launch your own disruptive business.

3. Ch-ch-ch-ch-changes

Sometimes you can enter the market at the perfect time and everyone is excited about the product that you’re developing at exactly the right time.

However, something can come along all kill your fledgling business stone dead; more often than not through no fault of your own.

One such very recent example is Southend-based start-up Zaptax. Founder Nathan Evans developed an app that helped small businesses to complete their annual tax returns. It met a very clear public need, had a robust and growing market and worked well.

Sadly for Nathan, March’s budget removed the annual tax return completely. Suddenly a brilliant app that helped hundreds of thousands of people became completely obsolete. It’s heartbreaking for the entrepreneur that put so much time and effort into a product that worked very well.

This is just a case of getting sucker-punched by fate – with little or no chance of ducking the blow. The only recommendations you can make are to research any rumoured changes to legislation that might be around the corner.

Look out for major events that may change the landscape – such as a General Election. In the run-up chancellors may make crowd-pleasing announcements out of the blue.

Also try to avoid making a product that is too narrow in its application. If the app had had more general accounting capability it could possibly have been saved – although obviously would have lost some of its USP value.

4. Too much, too young

As readers of this pages will surely agree, growing your business is the only way to move forward in this world. Avoiding stagnation and driving innovation will ensure you stay ahead of others in the field.

But sometimes, just like an unsuccessful flan, a young business can expand too quickly – only to fall back in on itself.

The dangers of this are many: over-reliance on debt, losing sight of your original vision and not keeping up with client demands are just three.

Back in 2013 wrote in the Huffington Post about his initially successful business turning into a living nightmare.

The advice site for small business was another product that met a real need many customers shared. But soon things started to get out of hand. The need to bring more employees in quickly to meet demand meant corners were cut, crises piled on top of crises and “the books were a mess”.

To avoid this happening keep regular tabs of where you are on strategy. Get plenty of opinions from as many people you can about the rate of expansion the business is experiencing. The more people are consulted the lower the chances they’re all being whisked away on the same entrepreneurial wave that you are riding.

5. Yes, cash is still key

For all of these other reasons, there’s no denying that a lack of funds still halts more start-ups than all other factors combined.

On average start-ups across the globe fold around 20 months after their final financing round – having raised $1.3 million. While that may sound like a lot, it’s nowhere near enough to sustain a company that’s not yet self-sufficient through revenue.

There are obviously too many examples to quote one. Similarly there is not much we can say to help you avoid this happening. Cash will always be king. But if you get everything else right, the chances of it running out are dramatically decreased. 

Further reading on start-ups:

The British invasion: how to break into the US market

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