9 Most Common Reasons Why Startup Businesses Fail

For the past couple of days I’ve been participating in a wonderful discussion group on LinkedIn exploring the need for competent strategic business planning.

Today, the conversation turned on some information released by the Small Business Administration as to the most common reasons start-up business fail. I took some time to dig a bit deeper into the reasons stated by the SBA and traced them all back to the strategic business plan.

A colleague suggested that he shared them on the blog. Here are the nine most common reasons why startups fails and how each reason can be traced back to the strategic planning process (the stages of the strategic business plan are in bold).

1. Over expansion

This risk factor should be mitigated in the market assessment phase of the planning process. Over estimating demand, misunderstanding adoption rates, or underestimating the potential responses within the competitive landscape can all lead to this misstep.

2. Poor capital structure

This is such a fundamental issue that can be traced back to understanding what your capital requirements will be and organising appropriately. It can be as simple as an LLC that is out looking for investors (yes, I’ve seen this). Knowing what one’s cost of capital is, at every stage, is critical. Please know, there’s a world of difference between finance and accounting.

3. Over spending

This often occurs when businesses take on too much overhead prematurely. Today, entrepreneurs can create a “virtual company”, where they can leverage their core competencies and outsource their weaknesses.

Again, this relates to conducting a brutally honest Self-Assessment, being exponentially conservative in Revenue Projections, and strategically prioritising Opportunities and related ROI through the use of Dynamic Parallel Targeting

4. Lack of reserve funds/cash flow

Where will you gain the most traction, the fastest, for the least amount of investment, that will also strategically position you for the next growth step? Keep in mind, you don’t necessarily have to be profitable immediately, but if you have ample cash flow you can buy time to build your customer base.

5. Failure to adjust to market changes

This relates directly to your market assessment and how you strategically position yourself in the marketplace. One thing many nascent entrepreneurs don’t appreciate is that structure enables nimble flexibility in rapidly moving markets. In order to tack quickly and efficiently to change, you must first know where you are, otherwise you may find yourself flailing about blindly.

6. Underestimating competition

Relates directly to one’s analysis of the competitive landscape. Whenever I am launching a new technology, especially a disruptive technology, I always operate on the assumption that someone else is doing the exact same thing in some garage somewhere, under the radar. Also, if you’re going after a big company’s market share, be prepared for retaliatory actions.  Never forget, big companies play from a position of power and entrenchment.

7. Poor execution

A plan is only as good as its execution, but good plans account for this by drilling down to tactics. Having a series of step-by-step action items, that are measurable within a committed time frame is critical when things get hectic.  Otherwise the tail ends up wagging the dog. Know your success gates, build in early indicators to validate your implementation, and hold yourself accountable with good performance metrics.

8. Poor location

How many times have you seen a series of new restaurants open and fail in the exact same building? If you’re business is dependent of traffic flow, accessibility, and neighbouring businesses, understanding the dynamics of this mission critical factor should be explored in the opportunities and threats section of your plan.

9. Inadequate business plan

I think points 1 through 8 clearly point out the number of issues that can sink the grandest of visions and the finest of intentions. All of the above risk factors should be closely examined in the strategic business planning process. If you anticipate a risk, develop a contingency plan (or several). What will we do if?

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