Reasons new businesses fail within five years

Thirty per cent of new businesses fail during the first two years of being open. This is according to the Small Business Association.

Also, 50 per cent of businesses fail during the first five years and 66 per cent during the first 10. Only 25 per cent make it to 15 years or more. 

Just like marriage, the first few years are the true litmus test as to whether your business will last. As you vow in a marriage “to have and to hold from this day forward, for better, for worse, for richer, for poorer, in sickness and in health, to love and to cherish”, you make the same commitment to your startup.

But things do go wrong. Divorce happens. However, your business needs not fail. With the right planning, funding and flexibility, you have a better chance at success. But where do those that fail go wrong? We go through  six mistakes start-ups make that lead to their ultimate failure.

1. Expansion before mastery

A majority of entrepreneurs believe that a company can only make a profit when it grows. They, therefore, expand too fast, forgetting that patience pays. In some cases, the more a company grows the further away from profitability it becomes. While growth is the goal of any organisation, it is not a necessity when starting.

Growth must be initiated when the time is right and when the entrepreneur has mastered their business model. Once you master the business model, the business will keep bringing in new customers and the entrepreneur will spend more time on the business rather than working in the business.

2. Focusing on competition

Many entrepreneurs tend to focus too much on what the competition is doing and not enough on customer feedback, forgetting the all-important fact that you are nothing without your customers.

At the end of the day “Life’s too short to build something nobody wants,” says Ash Maurya. The most important aspect of any new start-up is to solve an evident problem. After all, you start a business to solve a problem. The earlier you recognise this the better.

Some entrepreneurs focus too much on building their products without consulting their customers to find out their opinions and as a result end up building a solution that nobody is in need of.

3. Poor marketing

This is another reason why start-ups fail. Startups tend to use all their money on production and forget about marketing. They tend to forget that after you make your product, you need to get it out to potential customers.

Locating your target market could be as difficult as manufacturing a product if not harder. Start-ups fail when they run into problems after they have made a product and have no one to sell to.

4. Pricing

Setting the right price to product is crucial as setting the wrong price - too high or too low - will determine your survival in a competitive market.

Once customers buy a product or service for the first time and they become satisfied, the right pricing will bring them back. Every start-up must research on pricing since, price can dictate survival.

5. Lack of skills

Most entrepreneurs ignore the all-important African proverb “If you want to go fast, go alone. If you want to go far, go together.” In any business, your skills must be complemented with the ones of your team.

It is important to acquire expertise to succeed. We all have limitations to our capabilities as there will always be someone better. Don’t be a jack of all trades and master of none. Manage the business and let other skilled people run other components of the business depending on their skill level.

6. Inability to raise capital

A majority of start-ups fail even before they start as they run out of funds midway through their operations. This could be a result of poor planning or management. Do you have a plan on how to raise capital?

Many people start their businesses from personal savings, but this might run out. It is important to always have a plan and a backup plan on how you will raise capital for your business.