Why Do Many Startups/Businesses Fail Quickly?

by Jack Diehl

Across the country, many people are leaving their jobs and starting their own businesses. People may want to start their own business to follow their passion, have control over their lifestyle and schedule and pursue financial independence. However, according to Entrepreneur.com (“The True Failure Rate of Small Businesses”; January 3, 2021), the failure rate of small businesses remains high: 20% fail within the first year, 50% after five years, and 70% go under after 10 years.

Entrepreneurs Not Doing the Necessary Research for Their Market

Any upcoming businessperson should be making sure they diligently research their target consumers and additional audiences before beginning public operations. Knowing the local or regional market is crucial to sales, growth and workforce availability. If the business is slated to be a brick-and-mortar, the location should be highly visible and easily accessed by foot so there’s a better chance that the community will interact with the brand. 

In addition to knowing the local or regional market, businesspeople need to analyze what is happening across their supply chain. For example, if the United States is experiencing a gas/energy price spike, starting a trucking business or a delivery business that uses lots of petroleum may be bad timing and result in failure.

Hiring the Wrong People 

Hiring a group of people can be easy, but business owners need to make sure that team members are experts in the market they are going into. The hiring team should diligently review applications and have steps in the interview process that determine if the candidate has the introductory knowledge needed to succeed in the role. They should reach out to an applicant’s previous employer for a reference. 

Also crucial to success is the cohesion and loyalty between team members. Results are driven by compatibility and capability.

Spending a High Budget from the Start 

Financial challenges are a top cause contributing to the rapid decline of a business. Business owners should know their daily costs to run their business and how much is needed to break even. Most entrepreneurs are aware of their daily operational costs like rent, overhead expenses and payroll. Funding becomes an issue when there is a disconnect between how much revenue is created from sales and the daily operational expenses. Soon after, debt begins to rise, and the shortfall leads to a shuttered business. 

Financial shortfalls could also stem from not properly pricing services and products. Businesses that leave prices too low for too long will spend more money on production costs and delivery, not matching what is being generated in revenue, leading to a potential shut down. 

Finally, business owners must be on top of paying payroll taxes. If this is backed up, the government can garnish their bank account, which could put other bills in jeopardy.

Improper Marketing Strategies

No matter what product or service a businessperson plans to sell, marketing is a crucial step to the success of the concept. Owners should hold off on hiring an in-house marketing staff when launching to keep the overall budget down and focus on growing sales, not debt. Hiring freelancers or an external agency early on is cost-effective and short term, giving the business more flexibility. 

It is also helpful to study the competition and how they are effectively using social media to reach out to their audience. 

Other examples of improper marketing strategies include not creating and growing a website, ignoring search engine optimization methods and targeting the wrong audience.

Failing to Put the Customer First 

Entrepreneurs can have a well-rounded business plan and budget, but if placing the customer first isn’t part of it, they could see a possible decline in sales. Businesses have a moderate chance of failure if they focus too much on the product and not enough on the wants of the customer, who generates sales and external growth. Businesspeople must identify how to meet their customers’ needs by analyzing the current market and understanding what they are spending money on. 

Entrepreneurs should spend their energy turning the customer into a fan of the product or service. Repeat business and purchases drive at least 20 to 40 percent of average sales. Therefore, a high Google review is important. Business owners should be open to providing refunds or a free service/product if they receive a negative review to remedy the situation. 

There are going to be many challenges during the first year of business, so it’s important the entrepreneur ride those waves and follow the correct strategies at a steady pace until the business begins to succeed.  

Jack Diehl is president of Association for Entrepreneurship USA, which serves independent and small business leaders across all 50 states through community involvement, peer mentoring and education, and an opportunity to join forces for greater purchasing power.

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