Is Your Startup Failing? | 6 Reasons Why Startups Fail

November 22, 2021
Laura Smith

If you are reading this, then maybe you are an entrepreneur in the first year of business, in the process of starting a business or dreaming of innovative ideas and plans to get one off the ground?

Here we have a look at why startups fail, and in doing so, help you to navigate the potential pitfalls building a new business brings.

What Percentage of Startups Fail in the UK?

The stats behind new business failure are pretty mind-blowing. 20% of new businesses will fail in their first year, that’s 1 in 5 startups going bump in the UK.

According to the National Federation of Self Employed & Small Businesses, there were 5.5 million small businesses at the start of 2021, compared with the previous year, the private sector business population decreased by 6.5% (-389,600 businesses).

Of course, COVID-19 has played a part in these stats, but never the less, starting a new enterprise can be pretty tough going.

Why So Some Startups Succeed and Others Fail?

Ultimately a business fails when it runs out of money.  There are multiple single factors that may cause this or it could be a blend of reasons. Below we dive into the potential issues which cause startup businesses to fail in the UK and how to avoid them.

Top 6 Reasons Why Businesses Fail

#1 No Real Business Model

Thorough market research is key when designing a business model that not only works for a newly founded enterprise but also stands the test of time.

A successful business model has a strategic forward-thinking plan to consistently create value for customers but importantly, itself.

A business model is regularly reviewed and honed.

The cornerstones of a successful model answer important questions about the business and set out a strong vision relating to the market, customer strengths and challenges.

Solution? Define the problem that your business is going to solve, be that with trade, product or service.  This is when taking the time to really research the market and getting a good understanding of the competition could be the difference between success and failure in the first year.

Weak leader | Why Startups Fail | Great leader
"Leadership is the ability to get extraordinary achievement from ordinary people" BRIAN TRACY

#2 The Entrepreneur

New businesses have founders.  These guys are the entrepreneurial vision behind the business (this is probably you!), truly believing that the business can be a success.

But businesses fail under poor management.  If you struggle as a leader then your business may quickly slip into a hole.

From poor financial management to employee progression, morale and eventually productivity - all areas of your business will suffer, at best stunting growth but at worst leading your business to the end of the line.

Solution? To avoid this, enrol in training, read some good leadership books or better still find a mentor - someone who leads by example!

#3 Running Before They Can Walk

If you start to run before you are ready, chances are you will stumble and fall flat on your face!   As tempting as it may be after a strong start, scaling up too fast could be a recipe for disaster.

With rapid growth in startups also comes additional costs, your first employees, additional infrastructure. Are you truly prepared to handle it?

Solution? Don’t rush into premature growth. Slow and steady wins the race (and plan for disaster!) Build a strong continuity plan, mapping out how you will protect your assets and improve cash flow if things take a continuous downturn.

Grow Slowly | Why Startups Fail | Rapid growth
Keep expenses and outgoings as low as possible

#4 Debts & Cash Burn

Startups generally need to spend cash to push towards success so cash burn is something to ignore not avoid at the outset. But if they burn through savings in the early months and business growth is slow - how do they survive?

If you start to run short of cash but don’t fancy giving a chunk of your business to an investor then debt funding options for startups and small businesses, such as unsecured loans, from high street banks to new breed debt finance lenders could be a plan of action you may think is safe.  

Unfortunately, this decision to take on debt while your business struggles to grow could be fatal. Running out of cash is the top reason that startups site as their reason for failure!

It is much better to secure investor funding than to take on more debt at this time.

Solution? Keep expenses as low as possible and know your finances. Look at financial statements, forecasted budget and money flow weekly.  If you are in need of cash then look to source investment rather than loans to secure funding that won’t further strain and potentially break your foundling business.

#5 No Business Skills

No matter how strong your business idea, service or product is, if you don’t have good business acumen then you are likely to fail.

Running a business is an art form that touches many different skillsets. Ensure you have the business knowledge required to make it work before you start out or your startup will be a start-flop.

Solution? Ensure that you understand the breadth of skills you will need (or will need access to) to make your business works such as; financial skills, project planning and strategising, digital marketing, managerial and leadership skills, networking skills and in-depth industry knowledge of the area you wish to conquer!

Build a Strong Team | Why Startups Fail | Weak Teams
Find the right people to fill the gaps in your knowledge

#6 Weak Team

A weak team can sink your newly sailed ship. There is no doubt that when it comes to successful organisations they were not built by one entrepreneur alone.  That guy or gal knew they needed a strong team around them and they probably built that team up, team up, one member at a time!

Now, when we say ‘strong’ we don’t mean the unicorn of top talent, who will likely move on quickly, leaving you with a hole to fill. We mean knowledgeable, loyal employees whose own goals align with your businesses mission and culture.

Solution? Good folk are attracted to businesses where they believe they can contribute and have a huge impact while simultaneously continuing to stretch and learn alongside the growth of the company.  Aim to foster a company of like-minded people that bring skills and talents that meet your businesses short and long term needs.

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