7 Causes of Startup Failure: How To Harness Success

Updated in July 2023

Starting a business may sound simple on paper, but there’s a lot more planning required than many people give credit for. For example, it’s rare for a new organisation to effortlessly achieve growth and success because it’s so finely tuned to its target market. 

In many industries, newly formed companies will dive into the deep end and quickly find themselves struggling to keep up with the harsh reality of owning a business. That’s why it’s essential for every business owner to thoroughly plan their strategy, carefully evaluate the diverse risks associated with launching an organisation, and learn from the mistakes of preceding startup founders.

In this article, we’ll evaluate the top reasons for failed startups and provide useful tips to prevent collapse and foster success. Let’s get started.

7 Key Reasons Startups Fail

The latest insights from Failory show that the startup success rate is incredibly low, with 90% of small-to-medium sized businesses (SMBs) failing and 10% of those shutting down within the first year of opening. We’ve listed the main reasons why new businesses are unsuccessful.

• Lack of Business Plan

Failing to plan means planning to fail. 

Many new entrepreneurs fall victim to the endless waves of issues caused by starting too early. Without the skills, expertise, and experience necessary to build a well-structured business plan, it’s nearly impossible to launch a business and stay afloat long-term. 

Constructing a secure business plan should be the very first step when establishing your startup. Not only does it open the door to funding opportunities, it also provides a stable framework to promote your brand, products, and services effectively. However, it’s critical to understand the difference between a powerful strategy and an unsustainable one.

Here are some ways you can ensure your business plan is on the right track.

• Don’t only prepare for the best: A flawed business model will only consider the possibilities if everything goes according to plan. However, the landscape is tough, everchanging, and unpredictable. That’s why strong business strategies will also take the negatives into account, arranging a plan B, and even plan C.
• Get professional advice: To develop a plan you can rely on, seek guidance from those with real-world experience. They may be able to outline your flaws and offer tips and advice on how to correct them, so you can address these issues sooner rather than later.
• Avoid common mistakes: A great way to form a steadfast business plan is to learn from the mistakes of others. Frequent mistakes new entrepreneurs make include miscalculating costs, underestimating timelines, being too vague, and obtaining incorrect information when researching the market.

• No Infrastructure

Infrastructure refers to the organisational framework that enables business operations to function. A company’s infrastructure should include factors like facilities, equipment, administrative systems, technologies, and formal processes to ensure procedures function accordingly.

If you don’t invest in industry-standard hardware, software and tools that are both scalable and fit for purpose, it could lead to a variety of issues arising in the future. Putting an infrastructure in place in the early stages of your SMB will provide a robust foundation that allows processes to run smoothly and foster effective growth. 

• No Market Experience

A common reason why SMBs fail is the enthusiasm and confidence displayed by their founder being too strong — so much so that they believe a marketing strategy will be the least of their worries. However, without a comprehensive and accurate understanding of market need, it’s easy to accidentally focus efforts on the wrong consumers, which costs time and money.

The market is much more complex than it may appear. It’s no surprise that many startups initially struggle to accurately assess their targets and expectations for success. To make the most of your marketing efforts, it’s essential to conduct thorough market research, understand your target audience and identify the most effective ways to reach and engage with them. This will help drive engagement and sales conversion, which is invaluable to startup success. Ensure your products and services find the right customers and offer a unique selling point that drives consumers to consider you over leading competitors. 

• Failure to Adapt

Adaptability is a vital characteristic of a successful business. Even with an accurate view of the market, conditions can change incredibly quickly, so all organisations — not just startups — need to be quick on their feet to solve problems and adapt the moment issues arise.  

The 2020 pandemic provides a key example of a sudden, unexpected shift in market conditions that impacted the business failure rate of small startups worldwide. 

Strict bans on social interaction followed by tight capacity restrictions caused numerous physically-reliant companies, such as restaurants and small retail businesses, to completely lose their cash flow intake. To cope with these restrictions, organisations had to adapt, utilising online food delivery services and building websites to generate e-commerce sales.

Without a loyal customer base or much capital to fall back on, significant market changes have the potential to put many startups out of business. That’s why it’s essential to be adaptable, implement reliable finance support networks, and form strong partnerships to stay afloat.

• Poor Management and Leadership

No matter what job role you’ve come from, it’s very likely that there’ll be areas where you’re missing critical experience to manage and nurture the growth of your new business. In the past, lack of experience combined with mismanagement has caused plenty of startups with great potential to fail. 

To provide an example, construction startup, Katerra, saw its downfall in 2021 single-handedly due to gross mismanagement. In the beginning, the company was able to raise nearly $1.5 billion in funding, giving it plenty of capital to comfortably build an organisation. The SoftBank-backed SMB made strong claims that it was possible to slash the cost of apartment building and renovation, which attracted big-name investors. However, the leader of Katerra was managed by a tech veteran with zero construction experience. This large gap of knowledge in the field meant critical issues were ignored and problems continued to escalate as a result, leading to the inevitable failure of the business.

To prevent startup failure, refrain from premature scaling and form a robust team of advanced and diverse experts. From there, form a network of valuable contacts that can provide support when complex matters arise. This will create a strong team of capable individuals that know how to handle situations specific to their field.

• Lack of Finance

Steady cash flow can be a genuine challenge for startup agencies, even when supported by an angel investor. High volumes of sales don’t take place overnight, and of the clients you do have, you’ll likely have outstanding invoices that won’t get paid until the following month. Additionally, there are pricey startup costs to cover, as well as bills and staff to pay on top. 

That’s where payroll financing, also known as invoice funding, can give you the money you need to enhance your cash flow and make valuable investments. 

Payroll financing has been proven to help companies find their feet and promote stable long-term business success. Sonovate’s data shows that, of the recruitment agencies that launched between 2012 and 2021, only 37% of those that didn’t have a funding structure in place were still operational by 2022. However, a substantial 73% of recruitment agencies that invested in these funding solutions were still operational by 2022. 

Consider making use of these financial services to foster a successful startup in the early stages.

• Failure to Hire Strong Candidates

If an entrepreneur doesn’t have a strategy in place to target the right candidates, they’ll find it difficult to provide quality services. Regardless of industry, every startup owner at some point requires advanced technical skills for specialist positions. That’s why creating a structured recruitment plan is essential to helping enterprises reach the correct people for subject matter expert vacancies. 

To attract the talent you need to efficiently fulfill roles and satisfy your clients, you’ll need to focus on designing a talent-sourcing strategy and constructing an effective recruitment funnel. 

A recruitment funnel is a structured framework that organisations put in place to filter job applicants and identify the most suitable candidates for their respective roles. Areas to review include:

• Targeted job advertising: If you’re looking to fill a specialised role, make use of targeting tools to reach individuals from the relevant industry, and offer benefits that encourage job seekers to pursue their application.
• The applicant form: Make sure your form covers all necessary bases, such as qualifications and years of experience. But also don’t make it so extensive that it dissuades prospective candidates from submitting an application.
• Candidate screenings: Conduct thorough checks to confirm applicants have the experience and expertise they claim to have. 
• The interview stage: Get to know more about your applicants and assess whether they’re the right fit for your company in terms of their values, drive, and determination.

Strengthening these strategies will allow your small business to reach its full potential.

5 Steps To Prevent Failure

Now you’re aware of the key mistakes made by many startups, it’s important to understand the key takeaways and take steps to effectively nurture a steady growth rate for business success.

• Set Clear Goals 

Ensure you’ve laid out clear goals that are actionable within your business plan. Stick to the SMART framework to ensure you’re targeting your efforts the right way: specific, measurable, achievable, realistic, and time-bound. As time goes by, collect and assess your business data to highlight where your strategies are working, then find solutions to address problem areas. 

• Conduct Market Research Effectively 

Try to learn and document all necessary information about your market, and update your findings on a regular basis. Understand the pain points of your potential customer to drive engagement and boost sales. The more you know about your customers’ key demographic, characteristics and behaviours, as well as market demand, the more you can cater your marketing material to appeal to them.

• Love Your Career 

Starting up a business because it appears to be a profitable idea is all well and good, but it also takes strong and persistent passion to make it thrive. Before plunging into the monumental task of building an organisation, be confident that you’re passionate about your role, products and services. This guarantees you have the drive necessary to make your company succeed. 

• Don’t Back Down

No matter how powerful your business becomes, downtimes are inevitable. There will be unavoidable moments where sales are slow and targets aren’t being met. This may make you question your decision to continue pursuing your business efforts. Refrain from giving up during difficult times. Try to evaluate your strategy, freshen up your attitude and put in the extra hours needed to make it work.

• Find Financing Solutions

Payroll financing is a key differentiating factor that makes or breaks the success of a new startup agency. Here are a few reasons to use invoice funding solutions to maximise your startup’s growth:

• Boost in revenue.
• Better cash flow management.
• Improve client relationships.
• Reduced risk of bad debt.

Mitigate Risk and Harness Success

If you’re passionate about creating a successful startup business and want to build it into a long-term establishment, consider employing invoice funding solutions. For reliable failure prevention, Sonovate can provide tech-driven finance and workflow tools to support startups that engage contractors and freelancers. Our comprehensive platform is designed to reduce admin and save time, so you can focus on growing your business.

Sonovate makes a real difference to your company’s success 

Our data at Sonovate shows that recruitment startups who use Sonovate as their first funder grow 3 times faster than their peer average. This is because having a robust and reliable funding solution in place — especially one that offers flexibility and no concentration limits — enables them to have the steady cash flow they need to invest, promote, and boost their growth rate.