Why do so many new ventures fail? Here are five reasons!

failure-is-part-of-the-processThere are a great number of articles written about the challenges that face entrepreneurs as they launch new enterprises. The statistics certainly validate how difficult starting a new business can be for even experienced entrepreneurs. While it is difficult to discover accurate data on actual failure rates, Scott Shane is one of the leading experts in analyzing such economic data. Read one of his posts here – http://smallbiztrends.com/2012/12/start-up-failure-rates-the-definitive-numbers.html. You can find other well conceived data by checking recent studies by the US Small Business Administration. Here is some data from 2012: https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.
Clearly, one must take into account how many years are we measuring business operations, how failure is defined, what are the reasons for closure beyond failure, and closure rates associated with different industries.
No matter how you view the data, slightly more than half of new businesses that start in a specific year, do not survive past five years. Let’s take a look at five key challenges that entrepreneurs face when developing a new venture idea.
 

Reason One: Limited Knowledge of the Market. From working with hundreds of entrepreneurs over the years, the most common reason for deciding not to launch a new business or starting, but closing within the first year, is a limited understanding of the targeted market. When an entrepreneur has limited knowledge and understanding of a specific market, they have not:

  • Clearly defined the problem that the customer wants solved
  • Identified the target customer; who are the people in most need of a solution and are most likely to pay for it?
  • Segmented the target customer into categories based on potential differences in how they experience the problem that the product or service may solve
  • Researched the number of target customers potentially interested in purchasing the product or service
  • Focused their limited resources on a target customer segment where early success is achievable
While this situation is avoidable, the truth is that many aspiring entrepreneurs charge ahead without the appropriate understanding of the needs and desires of the customer, resulting in creating a business model and potentially a product when there is no market for it.
 
Reason Two: Inadequate Testing of Product-Market Fit. A second reason for startup failure is the entrepreneurs lack of effort to test and validate whether the product they have conceived actually solves a problem in a way that the customer values. Both criteria are required in order to have what we call problem-solution fit and sometimes referred to as product-market fit. In order words, does the entrepreneur understand how the customer experiences the problem when confronted with a task or job where the problem arises? When unpacking the customer experience, are the customer’s pain points identified? How severe are the pain points? To what degree does the customer value a solution that minimizes or eliminates these pain points?

Throughout the venture discovery process, you will have opportunities to test your assumptions about the customer’s experience with problems and solutions. Having a clear understanding of this experience will go along way to helping you create a product that the customer needs and values.

Reason 3. Limited Understanding of Competition. A third challenge that entrepreneurs face is not having a comprehensive understanding about their competitors. You cannot imagine how many new entrepreneurs tell us that they have a new venture idea that is so innovative that no one has thought of it before. Competition? There is none!.

Of course, there is always competition, whether it is direct or indirect, from established entities or emerging entrants. Studying your competition is a life long pursuit in the business context. It is not something you do sporadically. Throughout your venture journey, you will be required to look for emerging competitors as well as monitor existing product and service offerings from more established competitors. You need to identify their strengths and weaknesses and consider how they will react to each and every one of your strategic moves. What some call competitive intelligence will be an ongoing process for you as an entrepreneur and business owner.

Reason Four: Lack of Required Experience by Founders and Team. A fourth reason why start ups struggle to survive is due to lack of required experience by its founders and team members. Many entrepreneurs identify an opportunity, a problem that requires a new solution, with little or no expertise or competency in critical technical or knowledge areas needed to develop the proposed solution . We like to break down the required experience and skill sets into three areas, technical, marketing, and managerial. Of course, starting and operating a new business requires a number of skills and not to mention, a great deal of hard work. That said, there are clearly some critical areas where expertise is helpful and most times required. We find the following areas to cause the most trouble:

  • Selection of early employees with the right knowledge, skills, and attitudes
  • Not enough attention to customer engagement
  • Limited resources used on wrong items
  • Poor financial awareness
The greatest challenges for entrepreneurs are being able to manage a new business where conditions are ever changing and demand both focus and flexibility.
 

Reason Five: Not Thinking Through the Whole Business Model. A fifth reason for start up failure occurs when the team does not focus on all the components required for the venture to create a repeatable and scalable business model. We find that many entrepreneurs focus:

  • Initial attention on their product concept, with limited attention to what it will take to actually run the business
  • On other areas that require early attention including, but not limited to, customer issues, soliciting funding sources, and product launch challenges
The identification of a repeatable and scalable business model must be the entrepreneurs’ main concern in order to lay the foundation required to establish a venture that can launch successfully and grow within an appropriate timeframe.
 
Each of above challenge areas alone can often lead to failure. Many startup experts identify running out of funds to be one of the major causes of business closure. But we see it as more of an outcome due to not attending to the issues addressed here.
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