We’ve all heard success stories about startup businesses that began as “the little engine that could” and wound up as a thundering locomotive. The story behind one of these now giant companies, Facebook, was even immortalized in a major Hollywood film, “The Social Network.”
Unfortunately, for every new business that enjoys wild success there are exponentially more that fail. In fact, research indicates that eight out of 10 entrepreneurial ventures flame out within 18 months; but you don’t have to be part of the 80 percent who don’t make it. Here are the top reasons that startups fail and how you can avoid following in their footsteps:
Cash flow problems
Cash flow issues can arise in several different ways, but they all lead to a negative outcome. Failure to raise enough seed money is sometimes to blame, but often the problem is asset allocation. These new companies either spend more than they should on a business tool or buy one they simply don’t need instead of focusing on product development and advertising.
Solution: Make a list of critical items and take time to research the market for the best combination of features and costs. For example, a small business phone service provides the functionality of an expensive, complex wire-based phone system for a fraction of the price.
They don’t design with a specific user in mind
Products don’t sell to “the public.” They sell to a specific section of the population that needs or desires the solution. Sometimes the target segment of the population is extremely broad and other times the product fills a specific niche, but having a clear picture of end users allows companies to tailor their offerings specifically for them.
Solution: Create a mental portrait of the user you are building a product for, down to every last detail. Think about how they get to work in the morning, the problems they experience at work—everything. This portrait gives you insight that helps you optimize your product for your target consumer population.
The founders don’t share the same vision or commitment
In a company with multiple founders, if some consider the startup a fun side project and others quit their jobs to work exclusively on the new venture, problems are likely to arise. Resentments between partners can develop over time if their goals and the amount of time they are willing to spend on the new business differ significantly. Of course, disagreements about business strategy can crop up as well if not properly ironed out by the founders.
Solution: Have an honest discussion before the company is launched about where every founder would like to see the company a year, three years and five years from now—and how each envisions getting there. If perspectives differ, consider dividing equity in the company in a way that represents the time and effort each founding member will contribute. Make plans to re-visit the equity agreement down the line, as circumstances can change over time.