The 12 most common reasons businesses failFeb 08, 2023
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Businesses fail all the time, and everyone has a narrative.
Today we look at the top 12 reasons for failure.
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The 12 most common reasons businesses fail
Almost 20% of businesses fail in their first year. This likely comes as no surprise because we inherently get that starting a business is hard and that stat is referenced everrrrrywheerrrreee.
Looking out to year 5, 49.7% have failed and by year 10 65.5% have failed.
We get it… it’s hard to start and run a business.
So, why do businesses fail? That’s gotta be easier than running a business, right?
The problem is there is rarely one reason. It’s always a multitude of reasons.
There are so many reasons for business failure that if given a lifetime to list them all, you couldn’t do it (I learned this by scientific survey… don’t ask any questions, okay?).
A few have tried to figure this out… CB Insights did 111 post-mortems of failed startups and came up with the top 12 reasons for failure.
Today, we’ll go through these reasons one by one.
It’s impossible to deep dive 12 reasons, so we’ll be revisiting these reasons over the coming weeks.
Keep reading to the end to participate and get your chance to pick what I write next!
Ran out of cash - 38%
This is the most common reason and for me it was no surprise.
While few may think of it as the “root” reason, it’s the most common because business owners won’t give up until they run out.
So, while good tracking of reserves could be in order, you run out of cash because the business is failing in other ways too.
No market need - 35%
If they don’t need it, they won’t buy it.
This is obvious, but determining what the market need is can be extremely hard.
All the market research, the best product, the right customers… the reality on the ground is often different than the reality in theory.
Putting together a customer avatar, talking to customers, and solving a personal issue are all great ways to identify a market need.
Until you get this right, nothing else really matters.
Got outcompete - 20%
No one likes to think someone else is trying harder than them.
That’s why I was shocked to see this one so high on the list.
But the reality is your competitors are often better than you.
It could be the team, the product, the marketing… whatever it is, it happens.
Flawed business model - 19%
Businesses are started on assumptions. When those assumptions go wrong, money is lost.
Making mistakes in your business model is understandable, but often fatal.
Regulatory/legal challenges - 18%
When “breaking ground” in areas that haven’t been broken, these types of issues are inevitable.
It still blows my mind that Uber/Lyft had as few regulatory issues as they did.
If you vote for this one, I’ll likely try and find a subject matter expert.
If that’s you, reply to this email and I’d love to chat!
Pricing/cost issues - 15%
Let’s say this upfront: pricing is hard.
The biggest mistake I see people make with pricing is underpricing based on the value they deliver.
I’ve preached this in every situation, but when I find myself pricing my own products I do the EXACT same thing. I feel you.
There are many traps with cost:
- Assuming volume will decrease COGS
- Overhiring too quickly
We’ll definitely explore pricing and cost issues in this journey.
Not the right team - 14%
I get it, your friend is cool and you want to work together.
But, if working on a technical problem, he might not be the right fit.
There is a lot of talent out there, but finding the right people can be hard.
Maybe you have an idea, but turns out you don’t have quite the knowledge or background to make it real.
That could mean you fail because of your shortcomings or you fail because you can’t convince others you have the “chops.”
Product mistimed - 10%
Does anyone remember Google Glass?
When this product came out, everyone universally thought it was a dud.
What goofball would wear THAT on their face?
But, honestly, if you release that today? I think it might have a chance.
We’ve gotten just weird enough that some people would adopt it.
The timing could be too early (Google Glass), too late (Microsoft Zune), or one of many other factors.
Poor product - 8%
Sometimes the product just stinks.
But does it stink because you took shortcuts? Or quality was bad? Or it didn’t meet a need?
There are a million reasons for a product to miss the mark.
Disharmony among team - 7%
Your team is important. I talked about this when writing about FTX, which you can read here.
The team can either be too close or not close enough.
Finding the right mix can be hard, especially in a startup.
All it takes is one bad hire or attitude and the whole thing can become not-fun for the whole team.
Pivot gone bad = 6%
This falls under the strategy realm.
I think we see 2 scenarios here:
- Strategy isn’t working so you pivot
- You see a “larger” opportunity and pivot
In either case, pivots can be difficult to pull off.
I’d love to dig into this one a bit and explore the cost of pivots!
Burned out/lacked passion - 5%
In my content creation journey, I started out by posting about personal finance.
After a few months, I realized a few things:
- I didn’t love it like I thought I did
- Others really, really loved and would crush me
I’m a little surprised to see this so low, because I feel like the misalignment of what we think we’ll like vs what we actually like happens pretty frequently.
When looking at the reasons above, you can see how a multitude of reasons is the most common answer.
You had disharmony of team, which caused you not to catch your cash flow problem. Your product wasn’t bad, but you priced it wrong and you were ahead of public perception. Your strategy was killer, but competition lead to burnout.
The question then becomes “how can I see and address these problems before they kill my business?”
In the next few weeks, we’ll address this with your help.
I’m going to tackle these reasons (and others) from a numbers perspective. I’ll answer:
- How can I identify this failure before it happens (using numbers)?
- What can I do to combat it when I am presented with it?
I won’t share these issues in consecutive weeks, but I’ll dive deep on at least 5-8 before I move on. If you enjoy this style, it’s likely I’ll continue with similar series in the future.
- Signs continue to point to an economic downturn. This week Dell announced some layoffs, saying they were preparing for the coming “doom.” If you are trying to figure out how to prepare your business and would like some help, reply to this email and let’s connect!
- Everyone talks about passive income like it’s some sort of myth (and in many cases it is). But, what is the difference between active and passive? Financial Samurai, who has been around the personal finance space for a long time wrote a post where he broke it down. It’s really in-depth and something worth thinking about. Optimizing your income streams is a great way to create more leverage to create time or more opportunities for money.
- The AI race is on, folks. Microsoft announced AI being integrated with Bing. Google announced its own AI chatbot and stated that Google Search would prioritize quality content (whether AI-generated or not). This is something you can’t put your head in the sand on. Those who are plugged in are the ones who will get a competitive advantage.
If you have questions, feedback, or want to work with me, reply to this email. I reply to all emails and would love to get to know all of you!
See you next week,