Reasons Why Businesses/Startups Might Fail

• As has been hinted on time and time again not all businesses/startups are successful
• There is a lot of statistics out there about just how many businesses fail int heir first year
• Some claim as many as 90% of businesses fail in the first year
• According to one study by the United States based Small Business Association:
• Only 25% of businesses make it into their 15th year of existence
• There are so many reasons why business ultimately fail it would be impossible to enumerate them all
• Just like we have  innumerable things that can kill a human being
• There are however popular reasons that stick out when it comes to reasons why businesses fail
• These are the most common causes
• They include:
• Lack of experience by owners
• Insufficient capital (funds)
• Fraud/Misappropriation of funds
• Over-investment in fixed assets (non-current assets)
• Poor market research
• Poor location of the business
• Poor management of credit
• Lack of differentiation
• Overexpansion
• Lack of a succession plan
• Lack of contingency planning
• No diversification

Lack of experience

• There are certain characteristics that an entrepreneur needs for their business to be successful
• If an owner lacks one of these it might eventually lead to the downfall of their business/startup
• In addition to these characteristics, the business owner also needs to have at least basic business skills
• They need to be able to adequately managed working capital for example
• If the owner has not had a management position ( i.e. they lack experience) it might result in them making critical mistakes that will spell doom for their business
• A lot of new business owners lack experience in  areas such as finance, purchasing, selling, production, and hiring and managing employees
• Such new owners would be well advised to hire people with the relevant skills even if it is on a consultation basis instead of permanent positions

Insufficient capital

• A lot of new owners underestimate ( are not realistic about) the amount of capital they require
• Often a lot of new businesses take time to reach the profitable stage
• During their early years/months they can be making losses due to any number of reasons
• This can be exacerbated by lack of experience on the owner’s part which might result in a business taking longer to make profits than would otherwise be the case if an experienced person was in charge of the business
• Often the most successful businesses have a series of funding cycles where they raise funds once they have reached a certain stage
• If a startup fails to get additional capital at a critical stage it will burn out all its existing capital and ultimately fail
• Businesses like Facebook and Amazon took more than a decade to become profitable!

Fraud/ Misappropriation of funds

• This can happen in two ways:
• Plain simple fraud where owners or someone in the business takes business funds makes personal use of them
• This can be actually planned as in the case of pyramid schemes were the owners have a deliberate exit strategy to defraud whoever invests in their business
• It could also be unplanned where one of the managers/owners simply steals money
• Sometimes the owner can legitimately take money from their own business, in a way that still cripples the business
• There is however another form of fraud
• Some new innovative business might be formed around a new revolutionary and science-based idea
• For example, there was once a company called Theranos which claimed it could do a host of scientific tests using just a drop of blood
• When it turned out that its touted scientific method was a fraud the whole company crumpled into nothing
• The company was based on a fraudulent idea/claim
• At its peak, the company had an estimated value of $9 billion
• Overnight this was wiped to zero

Over-investment in fixed assets (non-current assets)

• Over-investing in fixed assets can be fatal to a business
• Usually, it means less working capital to the business
• Working capital is the lifeblood of the business and its shortage can lead to problems

Poor market research

• Market research allows the business to identify new opportunities in the market
• A business can then be formed to satisfy these new opportunities
• Faulty market research data might lead to a business making missteps and ultimately failing
• Some business are formed without any market research
• Here the owners simply rely on their own instincts/ gut feeling
• This can have catastrophic results if those instincts are wrong

Poor location of the business

• Location can hurt or boost a business’s prospects
• For example, a luxury brand that is located in a poor neighbourhood is likely to fail
• This is because people in that neighbourhood might not have the disposable income to spend on luxuries
• The location also affects taxes and other expenses that a business has to pay
• It also impacts on the distance to the potential market, availability of labour to the business, distance from raw materials etc

Poor management of credit

• In order to fund the purchase of assets a business has two major options
• Use capital that is brought in by the owner(s) of the business
• Or borrow money in the form of credit e.g. debentures, loans etc
• The balance between debt capital and equity capital is delicate and has to be managed carefully
• Otherwise, if a business fails to pay its creditors it might face liquidation or lose some of its critical assets leading to it shutting down
• For example, the creditors to a farm business might auction its irrigation equipment effectively killing the business

Lack of differentiation

• If a business fails to make its product stand out from those in the market this might spell its doom
• This is especially true if the market for that particular product is saturated
• For example, the mobile networks in Zimbabwe are have managed to achieve a penetration rate of more than 100%
• This means that anyone who wants and can have a phone now probably has one
• If a new play were to enter that market they would have to give their customers a compelling reason to switch over
• Offering more of the same will mean the new business will most likely fail

Lack of planning

• The planning stage is often ignored by a lot of new business owners
• If planning is not properly carried out it might mean the business being dead on arrival
• Planning allows the owners to define the objective clause
• That means expressly stating why the business has to exist/ the reason for the business’s existence

Lack of a succession plan

• Lots of business usually die with their owners or shortly after
• This is usually due to lack of proper succession planning
• The business would depend heavily on the owner
• For this reason, a lot of family businesses hardly ever succeed when they are held by the second generation of owners

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