What Went Wrong? The Reasons Entrepreneurs Fail and How to Avoid Them
According to Industry Canada, about fifty percent of small and medium-sized businesses fail before their fifth year; similar statistics apply over the border. It takes a confluence of many factors for a business to be successful and it is often a combination of interconnected factors that cause an enterprise to fail. We’ve taken a look at several expert opinions and studies and summed up the results for you.
No Value Proposition or Business Model
Issues concerning value proposition and lack of business model are the number one reason for business failure. Although it’s important to believe in your product, when an entrepreneur has an over-inflated sense of their product’s worth in the marketplace, it can spell disaster. If there is no compelling reason or event to cause a buyer to purchase, you are not solving a market problem, no matter how innovative the idea is. Entrepreneurs who start with a product and no business model usually don’t succeed. Sometimes, businesses come to market too early, before potential purchasers need the product enough to make the business model profitable.
Another bad sign is when a business spends more on landing clients than they are making from those clients (revenue v cost per sale), which happens more often than you might think.
Finally, in this age of disruption, everyone needs to be wary of the copycat syndrome. You may have a good business model, but if it’s easily replicated, you are opening yourself up to being out-competed or disrupted.
Don’t just ask your family and friends about your business idea. Doing market research and testing, even on a limited basis, will provide the feedback necessary to know whether you have a winning product. Analyze how you are going to find a scalable way to attract customers and how long this will take. Make sure you have a unique selling proposition or intellectual property that isn’t easily imitated.
Lack of Cash Flow (or Running out of Runway)
Many new business owners don’t understand that it can take a couple of years for a business to build a true foundation. The problem arises out of inexperience around what it takes to get revenue or turn a profit. As a new business owner, you should have enough money to start the business and operate it for a couple of unprofitable years. In the absence of investors, many small business owners don’t have the “war chest” to survive the lean early days.
Understanding finance and cash flow are critical. Having investors or a source of credit available is a way to stay afloat until profitability kicks in. If you have a business partner, make sure you have the conversation about burn rate and how long you will give the business to become profitable.
Poor Leadership/Management Team and Strategy
The cash flow problems of those who are starting and financing their own business may also relate to management competency issues. One study by U.S. Bank found that over 80 percent of businesses fail because of cash flow mismanagement. Businesses often fail because the owner didn’t utilize the skills of a CFO, accountant, marketing person or technical team member. On the flip side, some entrepreneurs believe that the strategy of rapid expansion holds the solution their problems. However, according to a study from Startup Genome, scaling prematurely was a predictor of business failure.
It’s critical to have a diverse team with experience in finance, sales and strategy, especially when it comes to the art of pricing and cost issues. Owners without those skills on board may consider hiring consultants, but it’s the leader’s job to keep all those elements functioning sustainably. For example, it’s your responsibility as a business owner to validate any idea, process or go-to-market strategy before approving full implementation.
Several studies have found that recruitment and retention are the number one struggle of businesses that have survived early stages of growth. Ensuring you are competitive within your industry and providing incentives and training can help employees continue to grow and develop.
Many businesses fail because they simply don’t have enough sales on an ongoing basis. This could be a problem with the business model or it may be a function of not spending enough money on brand development or marketing and sales, a common tendency of small entrepreneurial companies. These days, leadership requires strong communication skills; media and marketing savvy are essential skillsets for any business, both internally and externally.
Lack of Good Mentorship
A study by accounting software company Xero found that a third of successful companies had mentors or support groups compared with the 14 percent who ran businesses that failed. Research from Harvard University showed that characteristics for business success are a commitment, a willingness to stay the course while still maintaining flexibility, an understanding of general business and finance principles, and a readiness to listen, learn and develop the right mentoring relationships.
Mentorship and support doesn’t need to come from individuals in your industry. At TEC Canada, leaders from diverse businesses gain valuable insights through peer mentorship and an understanding of business principles from expert resources. They know that working for yourself doesn’t have to mean doing it alone.
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