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Start-Ups

Top Reasons Startups Fail

By Barbara Beauregard   |    March 9, 2016   |    9:54 AM

Avoid These Top Reasons for Startup Failure

Not every startup will succeed. In fact, according to a recent study co-authored by experts at Berkeley and Stanford, 92 percent of startups will fail within the first three years. But plenty of those entrepreneurial ventures might still be around today if they had avoided these top reasons that most startups fail.

First Reason : Market Problems

Two of the biggest sins among entrepreneurs is enthusiasm and ambition. Entrepreneurs who rush to the market with a product or service without understanding what they’re getting into run the risk of discovering that, in fact, there is no market yet for what they’re offering. There must be a compelling enough value proposition or a compelling global event to inspire the buyer into actually purchasing what you’re offering. Other times, the timing is simply wrong. Pitting Netflix against Blockbuster and Comcast in 2001 made no sense at all given the technology of the time, but by 2011 Netflix was making major market share and a mere five years later, the company is creating hugely popular original content and has driven Blockbuster into the grave.

Second Reason: Business Model Failure

One of the most common causes of failure in the startup world is that entrepreneurs are, for the most part, optimistic people. This means that they can often be very cavalier about how easy it will be to attract and keep customers. Entrepreneurs assume that because they build an interesting web site, new technology, product or service, that customers will organically recognize it as something they need and will beat a path to their door. The challenge of acquiring customers for less money than they will generate during the lifetime of your business relationship is an exacting and complex problem.

Third Reason: Poor Management

It’s a story as old as rock n’ roll—sometimes you just can’t keep the band together. A weak management team will tear the show apart before it’s even gotten a chance to start. Entrepreneurial management teams launching startups are often weak on strategy, focusing their efforts on building a product or service that no one wants to buy because they haven’t done their due diligence to validate the concept during development. Inexperienced management teams will also fail at execution, meaning the product doesn’t get built on time and the go-to-market plan is faulty. Bigger startups run the risk of a weak management team being propped up on the efforts of other, weaker teams below them.

Fourth Reason: It’s the Money

The most common reason that startups fail is because they ran out of cash. The key job of the management team is to understand just how much cash is on hand, how much credit is available, and whether those funds will carry the company to a platform with successful financing or positive cash flow. What goes wrong is that too often companies can’t hit those milestones before the money runs out.