How to avoid mistakes that hurt your startup
4 Common Reasons Why Startups Fail (and How to Overcome These Obstacles)
BY TERNG SHING CHEN | JANUARY 3, 2021
Most startups fail—up to 90% in 2019—and unfortunately, more often than not, the founders themselves are responsible. Financial reasons are often cited as one of the most common factors for startup failures, and these are, of course, hugely important. I have also found, however, that there are often more personal reasons why startups fail. These include dealing with personal relationships both within and outside the business and conflicting co-founder visions.
In this article, I will share some of the real reasons why I think startups fail that I have observed firsthand as a startup founder.
Conflicting co-founder expectations
Starting your business with a co-founder can be beneficial for many reasons. Studies have found that investors can be less likely to look favorably on solo entrepreneurs. However, conflicting co-founder expectations can lead to disagreements that are fatal for startups.
Noam Wasserman of Harvard Business School found that 65% of promising startups broke down due to disputes between co-founders.
Many founders partner with family or close friends. Take, for example, Jerry Greenfield and Ben Cohen of Ben and Jerry’s fame, who were famously friends from childhood.
Although it seems ideal, the familiar nature of these relationships can cause upset further down the line, as partners believe that they know each other’s intentions without ever discussing the specifics. To avoid any problems, co-founders, regardless of any existing previous relationship, should document the responsibilities of each partner, investment amounts and what will happen if one party wants to withdraw.
Ideally, this should be a formal agreement drawn up by a lawyer, or at least an agreement documented on paper. Having this document in place from the start can help entrepreneurs avoid emotionally and financially costly legal disputes that can even end up with partners in court. This can also help the company withstand the loss of one of its founders.
My experience with my own company, SYNC, experienced a similar challenge, as my co-founder exited the company before we even got off the ground.
Dealing with personal relationships
Entrepreneurs sometimes assume that running their businesses is a personal decision and thus embark on their project without consulting their families, expecting unqualified support. The demands and stresses of being an entrepreneur can lead to relationship breakdowns or the failure of your business due to problems at home.
Remember that your family is a stakeholder of your business, albeit sometimes an indirect one, and your ventures pose risks for them, too. Tension in families can leave entrepreneurs unable to focus on solving problems within their startups. Always talk to your partner or family before starting and win their support beforehand to minimize the chance of tensions disrupting your business or family life.
As discussed above, many co-founders are often friends, family members or even married couples. Reddit, for example, was started by two previous college roommates, Alexis Ohanian and Steve Huffman. Although this dynamic can be successful, it can also be challenging, as sometimes necessary conversations are avoided to prevent feelings from being hurt.
Embarrassment about money and failure
Failure can also be due to the unwillingness of business owners to talk about money or admit financial restrictions.
Take this personal example: In the past, I’ve accepted late payments for clients that we worked with because they were our first few clients that signed on. These constant delays, which ranged between a couple of weeks to six months, put a lot of strain on cash flow in the early days and were a constant source of worry.
What I learned is that it is essential to think of all of your stakeholders and how a decision may impact them. If you fail to chase down a payment, you are damaging your partners and employees who have invested their energy and time to make the business run.
Building profit versus cash flow
Focusing on profit at the expense of cash flow is a common mistake I have noticed among entrepreneurs.
A study by U.S. Bank found that in 82% of cases considered, inadequate management of cash flow or lack of understanding of cash flow was a contributing factor in the failure of small companies.
Entrepreneurs are sometimes tempted to cut corners in order to increase profits. Unlike cash, profit is a number generated by interpretations and accounting rules. It can give a false illusion that a company is doing well.
Instead of cutting corners and quality, I have found that businesses most often succeed by focusing on scaling the business and getting to economies of scale for better returns. Airbnb, for example, grew from a small operation in San Francisco to over six million rooms in 81,000 cities across the globe by 2019.
I ran into a similar problem at the beginning of my entrepreneurial journey when I looked at creating profitability from day one. This doesn’t sound bad on paper, but for a services industry, there is a cost to building a portfolio and a steady list of clients that every company needs. I had to reassess my business value and look at building cash flow until we got to a point where we could consider putting profitability at the forefront of all new business.
To this day, I still regret saying “no” to certain prospective clients, because working with them would have meant a lower profit margin compared to our average client. However, they would have made great case studies and eventually would have allowed us to potentially upsell and grow the value of the client over time.
Startup founders who find themselves with cash flow problems should aim to scrutinize each spending decision, especially in the beginning stages.
The various factors that frequently cause startups to have such a high failure rate have been explored and analyzed many times. In my experience, however, entrepreneurs should focus on the often-overlooked areas to ensure the longevity of their venture. For example, the responsibilities of each partner, relationships within and around business, and concentrating on the right priorities for business growth and scalability.