The first few years of a new business are often the most difficult. New business owners must struggle to find capital, suppliers, and customers, while also making enough income to pay the bills. Preparing for these risks is essential for a new business owner to be successful.
According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail within the first two years, 45% within five years, and 65% within 10 years. Only 25% of new businesses last more than 15 years. These statistics have not changed much over time and have remained fairly consistent since the 1990s. Although the odds are lower than commonly believed, many businesses close in the United States every year.
Entrepreneurs started 1,054,052 new businesses in the year ending March 2023, according to the BLS. Historical data suggests that approximately 210,810 businesses will fail in the first two years. With the right planning, funding, and flexibility, your business has a good chance of success. Here we look at some of the biggest mistakes startups make and how to increase your chances of success.
Key Takeaways
- New businesses are most likely to fail due to the combined pressures of raising capital, attracting customers, and making enough money to pay the bills.
- Approximately 45% of new businesses fail within the first five years.
- Failing to conduct market research and prepare a business plan are common causes of business failure.
- Many companies are unable to raise enough seed capital, which is essential for new businesses without a stable revenue stream.
- For more established businesses, there is also the risk of expanding too quickly without adequate market research.
Investopedia / Ellen Lindner
1. Not researching the market
You've always wanted to open a real estate agency and finally have the means to do so, but your desire to do so blinds you to the fact that the housing market is struggling and the area you want to work in is already saturated with real estate agencies and will be very difficult to break into. This is a mistake that will set you up for failure from the start. Instead of selling your product or service, you need to find an empty or unmet need in the market and fill it. It's much easier to fill a need than to create a need and convince people that they should spend money on it.
2. Business plan issues
A solid, realistic business plan is the foundation of any successful business. The plan outlines the achievable goals of your business, how your business will achieve those goals, and possible problems and solutions. The plan determines the need for the business through research and questionnaires, calculates the costs and inputs required for the business, and outlines the strategy and timeline for execution and achievement.
Once you have a plan, you should stick to it. If you start doubling down on spending or changing your strategy on a whim, you are setting yourself up for failure. Unless you realize that your business plan is grossly inaccurate, leave it as it is. If it is inaccurate, it is best to figure out what went wrong, fix it, and follow the new plan, rather than changing how you do business based on what you've immediately discovered.
The more mistakes you make, the more costly it will be for your business and the higher the chances of failure. You may also be asked to change course if market conditions change dramatically and negatively impact your chances of success based on your original business plan. In this case, revisit your plan and completely edit it based on the change of course you have decided to make.
According to a US Bank study, 82% of business failures are due to a lack of cash flow.
3. Lack of funds
If you've launched a struggling company, have little capital, and are struggling to operate, applying for new loans is not a good idea. If you're realistic from the start, you can plan to start your business with enough capital to last until you get on track and have real cash coming in.
Trying to raise more capital initially can slow your business down and leave you with a lot of cash to pay back. Lean management strategies are especially required at this stage, but can also be applied beyond this stage. Consider multiple channels for funding and lending. Educate yourself in this area and be creative in looking for alternative funding sources.
4. Poor location, internet presence and marketing
If your business relies on location to attract foot traffic, a bad location is self-evident. But a bad internet presence is just as dangerous. Today, your internet location and social media strength are as important as your company's physical location in a shopping district. Your online presence lets people know they can count on you for their business. So, if you already have a need, the availability and visibility of your business is the next important step.
This is similar to marketing. You don't just want your marketing to reach people, you want to make sure it reaches the right people. So make sure the type of marketing matches the audience you want to reach. Big billboards might not suit an internet company, and online advertising might not suit a heavy equipment construction business. If the need is already established, make sure you're reaching an audience that needs your product or service.
5. Stay stubborn
Once you have made a plan, established your business, and gained a customer base, don't be complacent. The need you are filling won't always be there. Monitor the market and understand if you need to change your business plan. Staying on top of major trends will give you plenty of time to adjust your strategy and stay successful. You only need to look at the music industry or Blockbuster Video to see that even successful industries can undergo major changes.
6. Rapid expansion
Now that your business is established and successful, it's time to expand, but you should treat expansion like starting over. If you're expanding the scope of your business, make sure you understand the sector and market you're entering. If you're expanding the scope and focus of your business, make sure you understand your new products, services, and target consumers as well as you do your current successful business.
If a business expands too quickly and does not pay due attention to research, strategy, and planning, the financial losses from a failed business can sink the entire enterprise.
Why do most startups fail?
Most startups don't survive the startup stage, with 20% failing after the first year. Surveys of executives reveal that insufficient market research, ineffective marketing, and not being an expert in the target industry are common pitfalls. Poor partnerships and lack of capital are also major reasons why startups fail.
What are the biggest risks for small businesses?
One of the biggest obstacles for small businesses is a lack of working capital. Small businesses tend to have low cash flow, meaning they have less room to maneuver if they face financial difficulties, and when they do, they need to borrow money or find investors.
How do you find the best market for your industry?
Finding the right target market is a big hurdle for new businesses, and an entire industry exists to market products to the right consumers. Marketing professionals use focus groups, surveys, and face-to-face meetings with potential consumers to find out who their customers are and what products they want.
Conclusion
About 20% of businesses fail in the first two years, but that doesn't mean you have to fail. With research, planning, and flexibility, you can avoid many of the pitfalls of a new business and become part of the roughly 25% of companies that last 15 years or more.
