Data from the Small Business Administration shows that an average of 80% of employer businesses survive the first year, 70% survive at least two years, 50% survive at least five years, 30% survive at least ten years, and 25% survive at least fifteen years.
That’s a much better survival rate than the frequently cited myth that 50% of businesses fail in their first year. They don’t. However, starting a business and going the distance is obviously quite hard and success is far from guaranteed.
Reasons why businesses fail
Figuring out why small businesses fail is a bit trickier because “failure” as defined by these statistics is simply the business no longer existing—anything else will have to be self-reported by the founder, and that isn’t always reliable.
CB Insights research based on over 100 startup post-mortems found these reasons listed most often for why the founder thought the business failed:
- 42% – failed to find a market need for their services or products
- 29% – failed due to running out of cash
- 23% – failed because they didn’t have the right team
- 19% – failed due to being bested by a competitor
- 18% – failed due to pricing and cost issues
- 17% – failed due to poor product offering
- 17% – failed due to a bad business model
- 14% – failed due to poor marketing
- 14% – failed because they ignored their customers
1. No market need
Product/market fit is the number one killer of new businesses. Reaching product/market fit typically means creating a product that is faster, cheaper, or easier to use than competing products or creating a product that serves a poorly-served segment of customers.
For example, Partake Foods was founded by a mother who wanted to find snacks for her daughter, who is allergic to gluten. Partake now provides gluten-free, vegan, and non-GMO cookies—a differentiating factor that helped them stand out in the crowded snacks vertical.
The other market factor to consider is whether a product category is growing or slowly declining. Generally speaking, there are four types of good product categories based on what trajectory they’re on:
- Fad. A fad is something that grows in popularity for a very short period of time and fades out just as quickly. A fad can be lucrative if your entry into the market and exit are timed perfectly, but this can be difficult to predict and a recipe for disaster.
- Trend. A trend is a longer-term direction that the market for a product appears to be taking. It doesn’t grow as quickly as a fad, it lasts longer and, generally, it doesn’t decline nearly as quickly.
- Stable. A stable market is one that generally is immune to shocks and bumps. It is neither declining nor growing but maintains itself over long periods of time.
- Growing. A growing market is one that has seen consistent growth and shows signs of a long-term or permanent market shift.
2. Ran out of cash
Outside of poor sales, the main reason businesses run out of cash is due to bad forecasting. Forecasting is the process of predicting future sales and expenses based on historical data. If you don’t have any historical data, you can still base forecasts on expectations and quickly update your forecasts as you get real data.
Forecasting may not be the most glamorous work, but it’s essential to the health of any business and much easier to control than your direct sales.
3. Not the right team
Starting a business requires a certain level of heroics—as the founder, you’ll be wearing a lot of hats. But any founder working with a co-founder, early contractors, or early employees knows that business really becomes a team sport. The primary reasons teams don’t work out are (A) a poor mismatch and overlap of skills and (B) poor team culture and cohesion.
Be wary of hiring your friends or people you personally like, and instead try to hire scrappy, resourceful people who help shore up your strengths in areas that matter to the business. E.g., if you’re already a strong marketer, but your business relies on streamlined operations, you might look to hire in that area to round out your team.
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