The Top Twenty Reasons Business Start-ups Fail

| February 5, 2015

Business risk  with crisisFailure may be the necessary prerequisite of success that everyone wants to avoid.  According to both Forbes and Bloomberg, 8 out 10 entrepreneurs who start a business will fail within the first 18 months.  Failure seems to be almost a rite of passage.  In the famous words of Thomas Edison, reflecting on his many experiments “I have not failed.  I’ve just found 10,000 ways that won’t work.”

Why?  What are the reasons that start-up businesses mostly fail, and how can that knowledge be put to good use?  There are many opinions, with antidotal examples to support each one; but is there any real data to give us insight into the question?

CB Insights, the venture capital website, undertook to answer that question in an empirical way.  They studied the data from more than 100 companies that died within 20 months of raising more than $1 million in funding.  They did so to understand the reasons for the collapse, and how the founders and the investors described their failure.   They then distilled their research into the top twenty reasons that are shown in the graph below.

top-20-reasons-startups-fail

Recently, Larry Sharp, Director of Training at IBEC Ventures, commented on this research and the top three reasons: No Market Need, Ran Out of Cash, and Not the Right Team.  IBEC Ventures is a leading company planting Business as Missions.   The Company presented a program at the 2014 Christian Professional Network Conference on using the marketplace to gain access to strategic and unreached places for the Gospel.  Since IBEC Ventures is in the business of business start-ups, they are particularly interested in why they fail.

Mr. Sharp’s comments include the following insights:

1. No market need

If there is no demand or you do not know how to create demand, then no amount of engineering talent will solve this. Selling demand to something that does not exist yet (selling faith while knowing you can deliver) is a skill in itself.

2. Ran out of cash

This can happen in three ways:

  • You didn’t raise enough cash to begin with;
  • The results didn’t happen before you ran out of cash; or
  • You scaled prematurely.

The whole point of the bootstrapping phase is to test and gain clarity in a new unknown area, while keeping expenses as low as possible so you can still be in the game when you can execute the clarity you gained. You don’t want to run out of cash before you can fully execute what you have learned in the startup phase.

3. Not the right team

There is nothing worse than working with the wrong people. It is a horrible way to spend your time. Note that you CAN’T change people. You may be able to train them +/- 5 to 10% in either direction but you can’t fundamentally change a person. Getting the people that naturally exhibit the personality traits for the success in the role is the only way to create a great team. These sorts of teams create 1000% returns with a lot less effort. In these sorts of teams, people want to work together and enjoy each other’s company.

Mr. Sharp’s full article is available here.

Christians in the marketplace are not immune from the laws of business, any more than we are immune from the laws of gravity.   Jesus noted the obvious in that the rain falls on the just and the unjust (Matthew 5:45).   His instruction to  “count the cost” (that is to properly capitalize) remains essential to success in business as well as discipleship.  (Luke 14: 28).

Graph sourced from CB Insights: The Top 20 Reasons Startups Fail (October 7, 2014)

 


Category: Management