Startup Tuesday: Why Do Startups Fail? Debunking the Myths

Posted by on May 21, 2013 in Startups [ 2 Comments ]

Startup failureAsk any entrepreneur or business owner why 25% of startups fail in the first year, and you’ll receive a variety of answers:

  1. They lack leadership
  2. They run out of money
  3. They don’t have a strategic plan
  4. They don’t understand their market
  5. They get tired and quit

But are these assumptions about the root cause of startup failures accurate? And are some small businesses failing because the owners either don’t know or don’t understand the real underlying threat to their success?

Related: Get funding for your startup from one of our small business loan providers

According to data from the University of Tennessee, half of all startups will fail before they reach the five-year mark. The key to getting your business safely to Year 6 is to understand why startups really fail – and take action to prevent it.


46% of all business failures are caused by incompetence on the part of the owner: charging the wrong prices, wasting money, not paying business taxes, or not knowing how to keep business records or manage their finances.

  • Get the right education. Whether you learn it through working, traditional schooling, online classes, or another method, you need to educate yourself on how to manage a business. Simply having a great idea for a startup isn’t going to cut it when you’re staring down at your double-entry bookkeeping or scratching your head at quarterly tax forms.
  • Know the worth of your product. Don’t set prices too low to make a profit because you’re afraid you won’t make sales otherwise. Conversely, don’t set your prices so high that customers are unwilling to pay.

Related: 7 Habits of Highly Productive Startup Owners

Lack of Managerial Experience

Knowing a lot about your industry doesn’t necessarily translate into knowing how to open and run a business. 30% of startups fail because the owner lacks the experience needed for not only starting a business from the ground-up, but keeping it running sustainably over time. Entrepreneurs who lack this experience don’t know how to:

  • Choose their clients, partners, and vendors wisely – thus avoiding scam artists.
  • Expand the business at a sustainable rate.
  • Calculate how much funding they need to get started, and acquire that funding.

Lack of Industry Experience

Another 11% of business failures are caused by the owner not having sufficient experience in their chosen industry. Perhaps they found success in another industry and decided to branch out, assuming that one is much like any other.

Related: 6 Resources for Managing Your Business Funds

When starting a new business, you can’t make any assumptions. Just because you found success as an auto part distributor doesn’t mean that you’ll be able to slide smoothly into the role of used car dealer. Every industry and business sector has its own rules: economic, social, and financial. Failing to acquire knowledge of those rules – and knowing how to navigate them – leaves you unprepared for dealing with the specific factors affecting your new business.

  • The mistakes new business owners make due to lack of industry experience include carrying inadequate inventory, failing to effectively manage their inventory, having no knowledge of suppliers, and wasting their advertising budget on ineffective, uninformed campaigns.

If your startup is at risk – due to incompetence, lack of experience, etc – then you need to take action to mitigate that risk. Learn about your industry, gain the experience you need, and hire talented people who can shore up your shortcomings and make your startup a success.

2 thoughts on “Startup Tuesday: Why Do Startups Fail? Debunking the Myths

  1. avatarSam Gill

    Fully agree, a proper planning before startup and considering above points you mentioned will surely help entrepreneurs to succeed and overcome failures

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