According to the Office of Advocacy of the U.S. Small Business Administration, approximately 70 percent of all start-ups fail in the first decade of operations. Since 10 years is a lengthy period, most experts focus on shorter timelines. Well, even when looking at the initial 12 months of operations, the number of companies that fail is concerning. Their downfall causes millions of dollars to go to waste while crushing the dreams of entrepreneurs from all around the U.S. Even though the government constantly seeks ways to aid these start-ups, many businessmen and women do not do the same. In fact, the top five reasons for such a high rate of failure boils down to errors made by the entrepreneurs.
Lack of Differentiation
Back in 2007, Forbes Magazine published an article titled “Differentiate or Die.” The concepts discussed there turned out to be very true for that year. More impressively, those same ideas are extremely important 12 years later as new start-ups come to life in 2019. According to a licensing company that operates in the service industry, Fazt Tech, the basic meaning behind the term simply describes how important it is to bring something new to the market. Trying to pass through the barriers to entry by copying opponents is about as redundant as securing a $10,000 loan with $10,000 in cash.
A lot of entrepreneurs try to enter the market by analyzing the actions of those who work in the same sphere. Although there is nothing wrong with learning from someone else’s failures or successes, actions should never be copied. Just because someone leveraged new technology to capture the demand, per se, does not mean that customers will fall for the same trick again. A much smarter approach would be based on innovation and creativity where new businesses bring a fresh and unprecedented offering.
Cash Flow and Capital Problems
Most new business owners have no problems managing initial capital that is poured into the start-up. Examples include venture capital investments, bank loans, and other forms of third-party borrowing. The problem starts arising when their cash flows do not support their short-term business plans. A lot of entrepreneurs make the mistake of overly relying on the anticipated sales. For instance, they plan on operating from the up-front capital for a few months and then switching to the revenues. Once those sales do not come in as expected, however, the cash inflows fall short of overhead costs that must be paid. These issues rapidly snowball into a complete failure and bankruptcy of the entity.
Cash flow problems mentioned above are a perfect example of insufficient planning. Although most business owners create short and long-term strategies for their venture, they seldom build contingency plans and safety margins. Instead, they rely on a single course of action that is based on external influences such as demand, competition, economy, and similar. Fazt Tech ranks this as one of the top two reasons why inexperienced business owners succumb to professional adversity. A simple way to sidestep the said issues is to spend a few extra months planning and analyzing all hypothetical scenarios.
Overly Aggressive Expansion
Entrepreneurs have a tendency to take a successful launch of their business as a hint to expand. Doing so is usually a terrible idea as one favorable outcome should never facilitate such a high-level decision. Sadly, those who let their best judgment take a backseat to aggressive scaling will probably see their business crumble. Why? The first reason is that a successful launch may be due to its timing or location. So, trying to expand and do it somewhere else may not yield the same results. Another reason is that competitors are always paying close attention to these types of market entrances. Once someone’s business undergoes an outstanding launch, the competitors will do everything in their power to undermine that brand immediately. Thus, the next launch might be futile because other companies have already stepped in to take those consumers back.
Finally, Fazt Tech points out that the lack of strategic marketing caused millions of start-ups to cease operations before closing the first fiscal cycle. As the digital age came to life and revolutionized the market, business owners from all sectors were forced to stay in touch with technological trends. A lot of newcomers who are starting their own companies do not have enough experience to comprehend this. Instead, they dedicate most of their time and resources to product or service development. Audience analysis and interest-based targeting do not cross their mind until lack of sales perpetuates financial issues. At that point, however, they seldom have enough capital to run the much-needed advertising campaigns to attract buyers. Hence why creating thorough business plans that take marketing and all other miscellaneous factors into consideration is crucial.