Why Do Start-Ups Fail?

General Business News

November 2014

Why Do Start-Ups Fail?

While many entrepreneurs have good intentions, an ingenious product or service and a lot of experience to back it up, not every venture is a success.

According to the National Venture Capital Association, 25 percent to 30 percent of venture-capital backed companies go bust. What are some reasons start-up ventures fail?

Poor or Non-Existent Accounting

Projecting (and re-projecting) foreseen and potential unforeseen expenses is essential before and during the start-up process. Not taking these expenses into account during the fund-raising phase and during the investment and build-up phase can spell disaster. One way to provide real-time information on how much money has been raised via crowd funding is to compare funds received to projected expenses using online accounting software.

Since start-ups can't rely on semi-regular or regular income like established companies can, online account software can give real-time figures when it comes to monthly or yearly expenses compared to start-up funds in hand.

Having the Right Team in Place (Or the Ability to Assemble One Rapidly)

Having the ability to hire the right staff when needed (and quickly) is essential for a start-up. One reason why startups fail is when they can't hire reliable and competent staff to delegate tasks to grow their business. Hiring someone might seem easy enough, but when solopreneurs either don't have the time to do it themselves or the money to hire someone, it can be time intensive to review resumes, call references and take a chance when someone looks good on paper.

Startup entrepreneurs can reduce the chances of failure by hiring someone they already know. This might include a former colleague at another job or a college classmate they’ve known through the years. Hiring someone with whom you have established a rapport will improve your chances that delegated tasks will be executed promptly and competently.

Not Understanding Demand (or Lack Thereof)

An entrepreneur might think he or she has a great product or service. However, if customers don't share the same feelings, it will fail. Raising enough funds and putting together a team of Ivy League graduates will be meaningless if there's no demand.

Idea testing does not have to be time or money intensive, but it should involve a large sample. If a product or service solves a problem or creates a demand, asking Facebook friends or Twitter followers to give you their opinion on that particular product or service can provide better direction and, most likely, greater success.

Incomplete Planning

Whether it's a product or service, incomplete planning can make or break a start-up company. For example, start-ups that make or sell manufactured products could experience a fatal gap in sourcing or production. Mistakes that can cost start-ups profitability and ultimately survivability include failing to plan for price spikes, supplier disruption and the lack of back-up suppliers. Start-ups also must have enough time to test products and reproduce samples. Just as start-ups go bust, product suppliers and manufacturers in the start-up and established phase can go under, throwing a kink in the start-up's plan.

There are many factors that can contribute to a start-up failing, but the main factor is failing to plan. While these are not all reasons why start-ups fail, reducing internal mistakes can help entrepreneurs weather external factors over which they have no control.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.