Top 4 Reasons New Businesses Fail and How to Avoid them

RICHARD WALKER|PUBLISHED ON MARCH 5TH, 2020

Top 4 Reasons Why Businesses Fail and How to Avoid Them
Photo of Petronas Twin Towers in Kuala Lumpur, Malaysia

Starting a business is like skydiving. The anticipation is worse than the jump.

It’s also one of the most fun and terrifying things you can do.

But once you let go, it all kind of falls into place.

Or so I’ve heard.

I’m not brave enough to jump out of a plane, but I did start a business in 2013 without any entrepreneurial background.

In fact, among my group of friends, I’m last person you’d expect to do so.

I always thought running a business took talent or genius. There was a certain mystique about it for most of my life.

But where there’s a will, there’s a way.

And there’s never been more ways to start a business.

With the ability to create any type of website in a few hours, you can start reaching your customers to test demand and build a client base right away.

Add in the ever growing list of services that can be delivered anywhere in the world.

Not to mention it’s insanely cheap.

Logos for example, used to cost thousands of dollars and take weeks.

Now you can get one for 5 dollars before lunchtime.

Or do it yourself on one of the many design software programs.

But most importantly, you can tap into a wealth of knowledge from other successful people.

If you are the last to go when your company has layoffs and your output is way more than your income, you are probably the right person to run a business.

Rather than focusing on the how’s of starting a business, let’s explore how to increase your chance of success.

In this article, we’ll look at the top 4 reasons why businesses fail and how to reduce their likelihood.

I’ll reveal the easiest way to start a risk-free business, including how I increased my chances of success before and after quitting my job.


Table of Contents

  1. Probability of Starting a Successful Business
  2. Why Businesses Fail
  3. Why You Should Start a Business
  4. Benefits of Starting Your Own Business
  5. How Hard is it to Start a Business?
  6. How to Increase Your Chances of Success
    Resources – Overcoming Cash Flow Issues
    Edge – Finding a Competitive Advantage
    Research – Establishing Market Demand
    Network – Building Your Management/Team
  7. Conclusion

Probability of Starting a Successful Business

Like I mentioned before, it’s well-known that 50% of all businesses fail in the first 5 years.

This fact paralyzed me with fear for most of my life.

But as they say, statistics are like a bathing suit, what they reveal is interesting, but what they hide is vital.

So let’s think about this one for a moment.

First of all, failure isn’t what the original statistic measures.

It’s simply the number of registered businesses that continue to be registered after 5 years.

There’s no data on why they’re no longer registered.

Some are the result of a pivot to another venture.

This is part of the journey as adjustments are necessary, even with a straightforward business like translation.

Or they chose to stop because it wasn’t for them.

If you don’t enjoy doing something and stop, it isn’t failure. It’s an insight gained and valuable experience.

One of the most underrated skills in life is knowing when to quit, so you can focus on more rewarding activities.

For other reasons, look no further than errant weights laying around in gyms with a self-racking policy.

These reasons can simply be:

  • Lack of focus, someone registered a business on a whim and forgot about it
  • Lack of knowledge, someone registered a business without any plan
  • Lack of support, someone registered a business and life caught up with them

As I mentioned earlier, if you’re a valued member of your team at work and feel you aren’t getting promoted quickly enough, these reasons will not apply to you.

After the first year, 80% are still standing.

That includes everyone with a half-baked idea like “canned air” to Richard Branson.

I’m actually surprised the number isn’t lower.

There’s a better chance of your business lasting a year than you beating the stock market.

In the end, 5 years is a long time.

If I had the choice of working at a company forever or having 5 years of freedom, I would choose the latter in a heartbeat.

With business, you only have to be right once to exit the rat race.

And as Robert Kiyosaki famously said,

“even if you win the rat race, you’re still a rat.”

So this statistic, which doesn’t specify reasons why a business no longer exists, and includes every type of business idea, could be keeping you from your ideal life.

So let’s find out why businesses fail, and go over some ways to lower that 50% figure.


Why Businesses Fail

Accurate numbers on why businesses fail are hard to come by, since self-reported surveys are the most common form of study.

So I included three studies on small businesses and startups to give us a better idea. (study 1, study 2, study 3)

The top 4 recurring reasons for failure were:

  • Insufficient cash flow
  • Lack of market demand
  • Bad management/team
  • Lack of competitive advantage

For the purposes of this article, I will focus on ways to overcome each cause of failure.

Why focus on problems when solutions are much more fun and productive?

  • Cash flow is covered in Resources
  • Competitive Advantage is covered in Edge
  • Market Demand is covered in Research
  • Management/Team is covered in Network

These are in order of importance.

There’s some overlap in each section, because solutions often solve multiple problems.


Why You Should Start a Business

Why You Should Start a Business
This is why. My favorite way to travel.

As an employee, control over your fate is limited.

It’s like the saying goes, make a plan for yourself, or someone else will.

Even though working conditions have improved throughout history, wages have stagnated since the 70s, while productivity has soared.

And I believe the Dutch East India Company has something to do with it.

You see, modern corporations have been around for over 400 years, starting with the aforementioned cartel.

They were pretty successful considering they had a private army and owned Indonesia.

And corporations have only gotten better at what they do.

Do the math,

400 years of practical experience maximizing profits and cutting costs

VS

your 20 something years on Earth mostly spent learning how to be a good factory worker.

Who do you think is better at looking after their interests?

It’s no wonder that 63 percent of people in their 20s want to own a business.

Now you might have the greatest coworkers, an understanding boss and fulfilling work.

I’ve seen it happen, and it’s great. I’m a little jealous too, since I never had all three.

At the same time, the only constant in life is change.

Great managers get promoted and replaced with less understanding ones.

CEOs get swapped out like iPhones, and your entire corporate culture changes overnight.

All it took for me was the addition of a toxic coworker to turn a good environment into a deal breaker.

I’ve also found that one person will usually rise to the occasion of being the token sociopath in an office. When I didn’t know who it was, it was probably me.

But, maybe I’m hypersensitive.

If you have a high tolerance for BS, I envy you.

What I perceive as unacceptable, others can shrug off.

They definitely have a lower blood pressure than I do.

Then there are those who keep their noses down, save every penny and plan on living their lives after an early retirement.

A good friend of mine calls this trading in your 30s for Netflix and happy hour.

All I can say is, it’s hard to see people over 60 struggling to climb the steps at Ankor Wat or Macchu Picchu. I often help them up.

I’m glad they’re living their best life now.

At the same time, many of them spent their best years making someone else rich.


Benefits of Starting Your Own Business

Benefits of Starting Your Own Business
Any place can be your office. Working at a cafe in Narita, Japan

There have been many studies on how to be happy at work.

The most basic three ingredients are:

  • Mastery – being able to hone a skill and learn new ones
  • Autonomy – being able to choose one’s work
  • Meaning – having a higher purpose that aligns with your values

I’ve also seen it defined as the job you’re doing, your coworkers and your company. You need to like all of them.

Regardless of what your definition is, once you start your own business, you will control all of these factors.

Other benefits I’ve found are:

  • Free time – if you consider time spent on commuting, meetings, water cooler talk and getting ready for work, I have an extra month of free time every year.
  • Control over your time – not a morning person? No problem. Work when you’re most productive.
  • Control over your clients – one of the greatest feelings in the world was refusing service to a toxic client. I’ve only done it 3 times in 8 years, but I remember every case well.
  • Control over your coworkers – Introverted? Your coworker can be a cat, or a dog. Or you can work with a remote team.
  • Automatic promotion to boss – No need to wait for office politics and your boss to decide when you are ready to advance in life. Take matters into your own hands.
  • Flexibility to work from home – I love working in my pajamas and making a healthy breakfast instead of driving to work in traffic. I usually start by 8am and take a lunch when I feel like it.
  • Choose your work – You can focus on the tasks you prefer, instead of having them assigned to you. I now enjoy making websites and writing, so I spend more time on them.
  • Self-discovery – No matter your current stage in life, you can always learn more about yourself and what you prefer to do. It’s a lot easier to take a step back from a hectic office environment and find out organically. I found that I’m more introverted than I thought. I was just pretending to be outgoing to get by.

How Hard is it to Start a Business?

People often say that starting a business is the hardest thing in the world, and requires tremendous sacrifice.  

In hindsight, I think they’re being a little dramatic.

Sure, it’s difficult at first.

If it were easy, everyone would do it.

But I never felt like I was suffering at an unreasonable level.

To put things in video game terms, it was like doing fetch quests everyday. But instead of virtual gold and experience points, I gained real money and fulfillment.

It took simple behavioral adjustments and focus, which came natural once my goal was set.

And sacrifices can mean less nights out partying, watching Netflix or playing video games.

This got easier because I started enjoying those activities less. After all, I’d rather work on making my life better.

Ironically, I have more free time now than ever. Hence the creation of this blog.

The truth is, if you’re killing yourself, you’re doing it wrong. There’s only so many all-nighters you can pull before a breakdown.

And a business must be sustainable or you’ll end up on the wrong side of that 50% statistic.


How to Increase Your Chances of Success

1. Resources – Overcoming Cash Flow Issues

Cash flow is one of the top reasons small businesses fail.

Running out of money is often related to poor planning. The chance of it happening can be reduced significantly with a little foresight.

Startup costs vary by business type. You can bootstrap an idea and see if it gets traction, or borrow a million dollars for a franchise.

You can probably guess which is wiser for your first foray into the business world.

My startup costs were 2,000 USD.

This is only because we bought desks and computers for future employees. (We managed to recoup our initial investment by the second month.)

The actual startup costs for registering a business were a few hundred dollars.

Keeping things lean and mean will increase your chances of success.

According to the Personal MBA, you want to be a turtle not a tiger. Tigers look great but starve once they get old and slow down.

Turtles don’t get much attention, but they last much longer.

Be more like Nintendo than WeWork and other fly-by-night startups that go bankrupt just as quickly.

Before you Quit

  1. Start saving immediately – add layers to your shell like a turtle. Save as much as possible before taking the plunge. Preferably 3-6 months of reserves.
  2. Start planning your escape on nights and weekends and when possible during downtime. See if you enjoy the process.
  3. Get help – I don’t recommend borrowing money, because that’s a whole other can of worms. And if you are turning your job into a business, you don’t need that much money. Use the resources from non-profits.

    We joined Global Center for startups in Seoul and received free business coaching and office space.
    But remember, there’s no free lunch and even government aid requires dealing with red tape. Valuable time that can be spent on other aspects of business.
  4. Exhaust all free options before buying something. Instead of paying hundreds of dollars for pictures, you can find places like pixabay.com and public domain videos. Or you can make your own with Camtasia and Canva.
    (Other resources are: Pictures, Music, Everything)
  5. Resist the temptation to pay for the most expensive solutions when starting out. You may think pricey options are the best way to boost credibility, but clean and simple always look more professional.
    For example, I paid top dollar for a highly functional WordPress template with fancy animations.
    It turns out it was also the slowest. And speed is vital to user experience and SEO.
    Same for implementing complex solutions when a simple one will do.
    Always look to cut out steps in your production chain and customer experience. Think of it as Occam’s Razor for business. Anything above what’s necessary is a waste.
  6. Check out Kickstarter or other crowdfunding sites. This is a two for one move, because you can actually gauge market demand while gaining funds.

After you Quit

  1. Don’t hire someone if there’s software that can do the same thing for a fraction of the cost. Best part is, you can cancel anytime.
    Firing someone sucks. It’s one of the hardest things I’ve done.
  2. Don’t hire someone on a recommendation – much like the hot stock tip, don’t take it.
    Make sure everyone goes through the same hiring process, regardless of who they are.
  3. Don’t hire at all if your business is location independent, until you have systemized and documented their position.
    One of the biggest mistakes I made was hiring someone before I had settled on their day-to-day tasks.
    It was a scramble to give them things to do and they lost respect for me because I wasn’t organized.
  4. Keep a low overheadeconomic cycles are shorter than ever before in history.
    This means that lean years are closer than you think.
    We’re able to breeze through economic slowdowns, because we’ve kept our costs low and reserves high.
  5. Invest in assets – it’s tempting to get a flashy sports car or fancy new drone(I don’t know, I’m not a big shopper). Get things that help you make money like equipment or software.
  6. Do the math – measure the cost and time it takes to perform a unit of output. Then measure how much you earn per output.
    For example, we calculated how long it took to do a page of translation vs how much we got paid.
    Now you can make informed decisions on how much to charge and what earns the most profit per unit of time spent.
    This also works when you are deciding to buy new equipment. Calculate how much more productive you can be during the lifetime of the unit minus repair and maintenance costs.

2. Edge – Finding a Competitive Advantage

Being outcompeted is a scary notion. It kept me up a few nights in the beginning.

I was prepared to do anything to beat other translation companies.

Nights, weekends and holidays. I pulled more than a few all-nighters to make my clients happy. Knowing what I know now, I could have avoided a lot of this.

Believe it or not, finding a competitive advantage and establishing demand complement each other when it comes to business.

Thanks to the internet, you can find out if there’s demand for your idea, while gaining a competitive advantage.

Competition is great to a certain extent, but not in a red ocean.

Those who compete there, lose.

Don’t try to do something quicker, faster or better. You’ll always be second best.

Pepsi has been duking it out with Coke for decades in an uphill battle to be number 2.

Do something different.

Think Southwest Airlines, the low fare airline. Rather than go up against industry giants that provide full-service flights, they found underserved customer segments.

College students and retirees.

Both wanted to visit family on weekends and holidays, but lacked the funds to do so.

Southwest made it easier for them to travel on a budget.

The result? They have been profitable for 45 years in a row. A miracle in aviation.

Tesla cars, fully electric vehicles that formed a new industry where GM and Ford are scrambling to catch up.

Apple with the iPhone that created a new category that revolutionized how people communicate.

Carmike Cinemas focused on rural areas that are underserved by big chains. Then they were acquired by AMC for a billion dollars.

Not bad for a small theater chain started in the 80s.

Alamo Drafthouse creates a unique experience for their guests. As a result, they make more money per customer than other cinemas.

Or this website, that focuses on ethical and sustainable lifestyle and products, instead of competing with well-established travel and business blogs.

In order to do this, you need to find your niche. And as an added bonus, assess market demand.

Before quitting work

Whatever your field of expertise, start by,

  • Thinking laterally. Meaning find alternative ways to serve customers.
  • Thinking vertically. Meaning analyze the step-by-step process and how to improve it.
  • Considering all the different groups of customers you have.
  • Logging all the complaints and desires you’ve heard over the years from clients.
  • Discovering a service in demand that your current company can’t provide.
  • Finding a group of customers that’s underserved.

If you are drawing a blank, get on Google AdWords(it’s free) and let the internet do the work. There’s no lying in web searches.

Type in your keyword to get more info than you need on human search behavior.

You can also see the cost per click to get an idea of how lucrative a keyword is.

Google trends gives a decent, but limited idea of search volumes, based on percentages of highest search levels.

Next check out Facebook, Reddit, Quora and forums related to your industry.

All the information is out there.

And the more you research, the less you sweat when it comes time to make the jump.

Check existing websites that serve your target demographic. Look for opportunities and get ideas of pricing.

See if there are paid advertisements on google. Read their copy and see what pain points they are addressing.

Think about what kind of value you can provide compared to existing service providers.

Finally, make sure you are happy serving that demographic. You’ll be working with them everyday. You might as well enjoy it.

Our customers loved us because we provided error-free translation on-time, every time.

I wouldn’t say it was calculus-level hard. It was just a matter of stumbling towards our goal everyday. Doing what we say and saying what we do.

Make a list of all the advantages you have. It will boost your confidence and give you ideas of what you need to improve.

Our competitive advantages were:

  • Low overhead
  • Attention to detail
  • Sales experience
  • Networking ability
  • Language ability
  • Industry experience
  • Advantage in quality with native translators in house
  • Motivation to never work at a company again

After quitting work

Even though there’s a lot of info to glean from research. There’s nothing quite like taking the plunge.

You get 100% realism.

Anyone can tell you that you have a great idea. But you won’t know for sure until they open their wallets. Especially if they aren’t related to you.

As you actually serve your clients in real time, you will learn more about their needs and how hard it is to actually fulfill them.

It was here that we found new opportunities and client segments.

Our business originally offered B2C and B2B translation for a range of materials including SOPs, resumes, and contracts.

After 6 months, we were able to figure out which ones provided the most money per unit of time.

The business model canvas helped us visualize our strengths and weaknesses.

Also, I read every book on business I could get my hands on.

I told myself that every one I read lowered my chance of failure by 5%.

You can even get audiobooks. They’re great for commutes or downtime at work.

Some of the more notable ones were:

  • The Personal MBA by Josh Kaufman
    provides overall MBA education without the 100,000 dollar price tag
  • Remote by Jason Fried and David Heinemeier Hansson
    teaches how to work effectively with remote teams
  • The E-myth by Michael E. Gerber
    explains how to organize your business like a franchise, so it’s easy to run and eventually sell
  • Made to Stick by Chip Heath
    demonstrates how to make your business memorable
  • Work the System by Sam Carpenter
    shows how to manage your business effectively to prevent fires instead of reacting to them
  • The 4 Hour Work Week by Tim Ferriss
    goes over how to effectively live a remote lifestyle
  • Freakonomics by Stephen J. Dubner and Steven Levitt
    teaches how to look at problems creatively
  • Outliers by Malcom Gladwell
    explains what makes something extraordinary

Survey your customers when possible to see how they feel about your services.

We found out that cosmetic companies were underserved, so we started focusing on them.

We customized their documents and increased our knowledge of the industry.

We made it hard for them to replace us, because they would have to train the next company on their terminology.

This is known as “widening the moat” between you and the competitors.

Look for product pathways that complement your services.

For example, we offered editing services for documents, to save our clients time.

We found out that most of our clients were too busy to meet up, so we minimized contact.

3. Research – Establishing Market Demand

One of my favorite analogies in the Personal MBA was opening a hotdog stand. What part would you focus on? The sign, the logo, the menus, or the hotdog?

The answer is simple. Make the best hotdog first, the rest falls into place.

Gary Halbert in the Boron Letters took it a step further. More important than making a superior hotdog, is finding a starving crowd.

The best part is, you can do both.

Most people don’t test the market for demand before starting a business.

Finding the right customer segment in the right industry can make or break you.

Hot new trends are great for a few years, but you probably want an income stream that lasts longer. It may be easier than ever to start a business, but it’s still a lot of work.

It’s a good idea to satisfy well-established needs.

Transportation, communication and internet, etc.

I don’t recommend getting into trends like pogs, furbies or vaping.

Bitcoin is another example as the market is already flooded with knock-offs. There needs to be a major evolution in the industry for there to be growth.

But I wouldn’t stake my livelihood on it. They will be hot for a few years and then cool way down.

Same for digital nomadism. All the people who were going to do it have either tried it and found out it wasn’t for them or never got off the ground floor.

Here are two things to gauge demand I wish I had done before quitting my job:

  1. Start by asking people about services they would like. If you are planning on going into the same industry as the one you are currently working in, ask your clients now.
    You can get paid to conduct market research.
    Get 5 people to give you financial commitments totaling 20 percent of your monthly break-even-point. If you can’t do this while you have a steady paycheck, imagine how hard it’ll be when you’re burning cash.
  2. Start advertising your service or product before you quit your job – you won’t know if your idea will work until you can get people willing to part with their cash.
    You can buy ad space on google for 100 dollars to see if your idea gets any traction.
    Set up a payment method and refund their money or offer credit when you start in earnest.
    Use Leadpages or Unbounce to make a quick mockup site and start getting email addresses and deposits.
  3. Start blogging about your expertise. I’m a pretty private person and avoided putting myself out there for a long time. It took the encouragement of a good friend to give it a shot. I’ve found it really doesn’t matter what people on the internet think about you. And you’ll find an audience if you are informed and passionate. This is a long-term way of establishing demand for your services.

It would have made my life a lot easier.

Fortunately, my partner was able to gain information from her job in the industry.

She was able to establish, that one, there was plenty of demand for translation, particularly Korean to English, and two, most clients were not satisfied with their level of service.

If this makes you uncomfortable, you can forgo this part. But if we truly have a free market system, a little bit of competition never hurt anyone.

And I don’t think your company would have any qualms about shipping your job overseas.

If you can take a client from a company with more resources and experience than you, it was never theirs to begin with.

4. Network – Building Your Management/Team

A partnership can make or break a company, and your life. Many of my early mistakes were surrounding myself with the wrong people.

I went to speed networking events, which is like speed dating except you’re there for business, not pleasure.

You can also find after work functions in most cities. Check out meetup.com or business forums.

Start with the road trip test to make sure you are comfortable with someone. Basically you meet them and ask yourself if you’d be comfortable taking a cross-country trip with them.

Then communicate through work. The interview should be actual problems your company faces and how they find solutions.

Try small collaborations like designing a website or creating a business plan to see how you work together.

I actually worked with my current partner on company projects before starting our own.

In other words, date before marriage. A breakup is hard enough without joint bank accounts or children.

There are three main types of people according to the e-Myth.

  • Entrepreneurs – people with the ideas who look for competitive advantages
  • Managers – people who run the day to day and make sure logistics are in order
  • Technicians – people who actually do the work and take pride in the details

Two of the same kind make it much harder to run a successful business.

Ideally, you will find people who cover the bases or simply hire consultants to fill in the gaps.

Start codifying your job and all the positions in it. Even if you are the sole proprietor.

Create a culture of openness and equality.

But not too equal. Some people will mistake kindness for weakness. It’s a good idea to get rid of these people when possible. It’s better than needing to create a toxic work environment to keep them in line.

Watch out for narcissistic behavior before you hire someone. Ask about mistakes they made or things they’ve learned from others. If they draw a blank, or don’t answer honestly, forget about it.

Give them a task with incomplete information and see how they solve a problem. See how they handle criticism. Do they become annoyed or do they show they can learn?

Take them to lunch and see how they treat servers.

Henry Ford went so far as to not hire anyone who didn’t taste their meal before adding salt.

If you have any doubts at all, do not hire them.

Give them projects until they prove to they can be trusted.

Best idea wins, no matter who came up with it. There’s no room for egos. Your agenda should be first not because you set it, but because it’s the best course of action.

Find the right model for you. Don’t just assume that you need 100 employees to be successful. You can make enough money with a small staff.

Protect your time like it’s your bank account. You wouldn’t just give money away to anyone, why would you give your time to unproductive people or ventures?

As more people found out about my new business, I noticed how some acted differently.

It was interesting to see how people can change when you try to improve yourself.

Most of those close to me were supportive and gave good advice.

There were also a few people who told me my industry was already saturated or that AI was going to take it over tomorrow. I got my fair share of hostility from acquaintances.

They were either jealous or threatened by my choices. I keep an open mind to constructive criticism, even when it’s painful to hear.

But crabs in a bucket that try to pull you down must always be ignored, no matter who they are.

There’s something I like to call the 2-6-2 rule.

It says that 2 people out of 10 will like you no matter what. These people think you can do no wrong for whatever reason.

2 out of 10 will hate you no matter what. You could lay on the ground for them to walk on and they’d complain you weren’t flat enough.

And 6 out of 10 will be neutral and can go either way.

It puts my mind at ease knowing that you can’t please everyone, and some aren’t worth your time.

With 7 billion people in world, you can afford to be selective.


Conclusion

Starting a business is scary, but you can stack the odds in your favor by managing risk and being organized.

And we can certainly do better than a 50% success rate if you follow the advice in this article.

In the end, you have to enjoy the process. And it’s not for everyone.

But you either win or you learn.

So don’t wait for your boss or conglomerates to change their stripes. They are just following the playbook that’s been honed for centuries. 

Don’t wait for Elon, Jeff or conglomerates to suddenly care about you.

They have enough resources to create tax loopholes for themselves.

They may give away a few million dollars now and then, but that’s literally pennies on the dollar for good PR and tax write-offs.

And don’t wait for the government who is largely chosen by said conglomerates.

Take matters into your own hands.

Turn your job into a business.

Find out more ways to start a better business!

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