Knowing the biggest risks that usually cause new startups to fail can make the difference between your business sinking or swimming.
Whether it’s bad luck, bad timing, or a half-baked business model, there are many ways a startup can go wrong. According to data from the US Bureau of Labor Statistics, approximately 20% of new businesses fail in the first year.
Fortunately, some new research can shed some light on the biggest recent obstacles that have thwarted startups.
Skynova, which makes invoicing software for small businesses, surveyed 492 startup founders in November 2022 and analyzed startup data from CB Insights for a new study that looks at the most common reasons startups fail in 2022.
- Lack of financial resources or investors. The study notes that 47 percent of startup failures in 2022 were due to lack of funding, nearly double the percentage that failed for that reason in 2021, according to data from CB Insights.
- Lack of liquidity was behind 44% of failures. While this could be the result of poor financial planning, it could also indicate a lack of available funds.
Capital issues aren’t surprising given that fears of a potential recession, among other factors, have caused investment in North American startups to drop 63 percent in 2022 compared to the previous year, according to a recent Crunchbase report.
Anyone looking to start a new business in 2023 may face similar obstacles to funding as long as economic uncertainty persists.
- Impact of the ongoing Covid-19 pandemic. While 33 percent of startup failures are attributed to the pandemic’s widespread business and macroeconomic effects, CB Insights data shows that number is down from 59 percent last year — a sign that many small businesses are recovering from the worst. Epidemics have improved. In 2022, even as some were still trying to get back to normal.
Startup success advice from founders
While no entrepreneur can guarantee success, the founders surveyed by Skynova had plenty of advice to offer anyone looking to take the leap and start their own business.
When asked what they wish they had done differently when starting their business, 58 percent of founders surveyed said they would have done more market research before launching. The same percentage said they wished they had prepared a stronger business plan.
This is in line with the recommendations of the US Small Business Administration, which notes on its website that a solid business plan is critical to the success of your startup and can act “like a GPS for how you structure, operate and grow your new business.”
It’s also important to be able to think on your feet and make necessary changes if your plans don’t work out as you’d hoped. When asked to give their top advice to aspiring founders, 79 percent of people surveyed by Skynova told those aspiring entrepreneurs to “learn from your mistakes.”
It seems they speak from experience, as 40 percent of the founders surveyed said they had already focused their startups in a way to avoid failure. And 75 percent of them said rotation helped them succeed.
The most common types of pivots mentioned by founders are making changes to their business plans or launching a new product or improving an existing product.
Recognizing that your startup is on the path to failure and successfully turning it around to avoid disaster is a skill that every successful entrepreneur can use. In fact, failure to pivot is one of the most common reasons startups fail, according to CB Insights.
“Shark Tank” investor Kevin O’Leary previously told CNBC Make It that his losing investments often have one thing in common: startup founders who either can’t or won’t make changes. If necessary. In many cases, these founders simply refuse to admit that their original business plan needs updating to survive.
“They can’t get out of their own way,” O’Leary said. “They don’t listen to anybody else.”
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