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Why do Start-Up Businesses Fail?

Updated: Dec 5, 2023

In 2021, more than one company was formed each minute. However, of the businesses founded 5 years earlier in 2016, less than 40% survived to 2021. So, why do so many start-up businesses fail? Understanding the common pitfalls and points of failure can help new start-ups tackle them effectively and go on to thrive.

1. One the key failure points for many businesses is that the market does not want to purchase their product or service, that is, a lack of desirability. Just because an idea sounds good in theory, if there is no genuine demand for the product or service on offer then the business will struggle. Before launching a business, it is important to conduct some effective market research. Understanding what customers really need, what they are willing to pay for and the problems they are trying to solve is essential to creating a successful offer.

2. Another key problem for many start-ups is a lack of cash flow. Not having enough cash to operate can be a massive sticking point for small businesses, after all, there’s no point in receiving a large order if you can’t afford to fulfil it. There are many ways to finance a start-up and most will need to use a combination to create sufficient cash flow. Other than the obvious options of debt, grants and investment, start-ups often benefit from schemes such as invoice-factoring for a quick injection of cash, crowdfunding, or accelerator programmes which sometimes come with funding.

3. A flawed business model: ensuring that your business model is robust and validated is extremely important for a successful start-up. Your business model must be desirable (see number 1), feasible (can you deliver it?), viable (will you make money?) and adaptable (can it cope with the unexpected?). We recommend completing a business model canvas which is a quick way to visualise all the critical aspects of your business, how they fit together and any significant gaps.

4. Competing with more successful competitors can be extremely difficult for new start-ups, especially in a saturated market. This makes it extremely important for start-ups to identify their specific value proposition and understand why customers would choose to buy from you rather than your competitors. What is it that makes your business stand out from your competitors’? This is the advantage that you need to promote and use to make yourself stand out.

5. Another challenge that start-ups often face is problems correctly pricing their products or services. It can often be tempted to choose a low price in order to attract customers, however, if your costs aren’t covered, this can lead to financial instability. On the other hand, pricing yourself too highly can cause customers to turn elsewhere. Regular pricing reviews and customer analysis can be extremely helpful in ensuring that your prices accurately reflect the value of your services and fit within the range that your target customers are willing to pay.

These are just a few of the challenges facing start-ups, however, just being aware of the potential problems can help a founder deal with the challenges. Having a plan in place to deal with them is the first step to ensuring survival and starting your business on the road to thrive!

Discover our Start-Up Business Pack below.


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