Knowing the biggest risks that most often cause new startups to fail can make the difference between whether your business sinks or swims.
Whether it’s bad luck, bad timing, or a half-baked business model, there are a number of ways a startup can go wrong. Nearly 20% of new businesses fail within their first year, according to data from the US Bureau of Labor Statistics.
Fortunately, some new research can shed some light on the biggest recent roadblocks that have frustrated startups.
Skynova, which makes invoicing software for small businesses, surveyed 492 startup founders in November 2022 and analyzed startup data from CB Insights for the new study looking at the most common causes of startup failure in 2022.
- Lack of funding or investors. The study notes that 47% of startup failures in 2022 were due to a lack of funding, nearly double the percentage that failed for the same reason in 2021, based on CB Insight data.
- Running out of money was behind 44% of failures. While this may be the result of poor financial planning, it can also indicate a paucity of available financing.
Capital issues aren’t surprising, given that fears of a possible recession, among other factors, caused investments in North American startups to drop 63% 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 hurdles to securing financing, as long as economic uncertainty persists.
- The impact of the ongoing Covid-19 pandemic. While 33% of startup failures are attributed to the pandemic’s widespread effects on business and the broader economy, CB Insight data shows that the number is down from 59% a year earlier — a sign that many small businesses are recovering from the worst of the pandemic. In 2022, even as some continue to struggle to return to normal.
Startup success tips from the founders
While no entrepreneur can guarantee success, the founders surveyed by Skynova had plenty of advice to offer anyone looking to make the leap and launch their own venture.
When asked what they would like to do differently when starting their own business, 58% of the founders surveyed said they would have done more market research before launching. The same percentage said they wish they had a stronger business plan.
This is in line with advice from the US Small Business Administration, which notes on its website that a solid business plan is central to your startup’s success and can act “like a GPS for how you structure, manage, and grow your new business.”
Also crucial is the ability to think on your feet and make the necessary changes if your plans don’t work out as well as you hoped. When asked about their best advice for aspiring founders, 79% of those surveyed by Skynova said that hopeful entrepreneurs “learn from your mistakes”.
They seem to be speaking from experience, with 40% of the founders surveyed saying they had previously directed their startups in some way to avoid failure. And 75% of them said that pivoting helped them achieve success.
The most common type of pivot found by founders was making changes to their business plans and either launching a new product or improving an existing one.
Knowing that your startup is on the verge of failure and pivoting successfully to avoid disaster is a skill any 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 told CNBC Make It that his losing private investments often have the same thing in common: startup founders who either can’t or won’t. when necessary. In many cases, these founders simply refuse to acknowledge that their original business plan needs to be updated to survive.
“They can’t get out of their own way,” O’Leary said. “They won’t listen to anyone else.”
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