Understanding why start-ups fail
Posted by Northadvisory on February 24, 2021
Start-ups can be an exciting endeavour, but they can also fail for a multitude of reasons. Some of the most common reasons why start-ups fail include no market need, running out of cash, not having the right team and getting outcompeted.
A closer look at these common reasons reveals most of them were caused due to a lack of deep understanding of the start-up’s target audience and could have been prevented if a consumer-driven approach was applied.
Let’s dive deeper into the major reasons why start-ups fail.
No market demand
Business works on the supply and demand equation. If there’s no demand in the market for your product or service, then unfortunately it is predestined to fail.
In fact, a study by CB Insight shows that more than 40% of the 101 shutdown companies examined failed because they had planned their product or service completely out of the market. In some cases, the market was not yet mature or features were developed that were not relevant from the point of view of the target market.
So, it’s vital to understand what your target market is looking for.
Creating a new business idea is relatively straightforward. That’s the easy part. But redesigning, adjusting and refining the product or service to meet the demands of your market is the challenging part of the business puzzle.
As a business start-up, you need to listen to your target market and your potential customers. It’s your job to understand the underlying elements of what your target market is looking for and adapt your ideas around that.
Lack of financial resources
Lack of financial resources is not necessarily due to lack of funds but can be caused by the imprecise use of funds. In the growth phase, follow-up financing is often missing.
The CB Insight study puts the proportion of companies that failed due to liquidity problems at just under one third (29%).
Again, understanding your market is vitally important, because your target audience knows where and what you should be spending your money on.
Their reactions can prevent you from spending excessive time and money and can encourage you to keep working on something else for which they’re willing to pay a premium. They can provide valuable feedback that can shape your future product development.
Monitor your competition
Every start-up needs to analyse their competition and never underestimate the competitors. Never stop examining what they are doing in your target market; monitor their marketing and understand their pricing structure.
As a start-up, you need to appreciate the landscape before you consider launching. Start by identifying the strengths and weaknesses of your main competitors. They have a share of your market for a reason, so understand their points of difference, prices and marketing focus. The more informed you are about their businesses, the better.
The wrong people
Another reason why start-ups fail is problems and inconsistencies within the team. If the cooperation between the team members does not work, the start-up doesn’t stand a chance, either.
An unbalanced composition of the teams often hampers the success of the start-up. Sometimes there is a lack of important skills for the technical implementation of the business idea, or there is a lack of interface between management and technical departments. Selecting the right people from the outset can make all the difference.
As a start-up, you’ll invest a huge amount of time and money in research and development, professional advice, a shop or office fit-out plus equipment and stock. It’s a massive financial and emotional investment that could amount to nothing if you don’t get your marketing right.
When you finally open the doors of your business, don’t expect a queue of customers unless you have suitable marketing tactics in place.
If you want a successful business, it’s essential to have a predictable system for attracting your ideal type of customer. That requires you to map out your marketing plan.
Any kind of marketing that doesn’t generate revenue is wasted money and wasted effort.
At North Advisory, we have extensive experience in start-up business accounting. We can help you navigate your way through all the ‘new business’ information. If you’d like to find out more about how we can assist, please contact us today.