In case you missed it last week, I created a survey to get your feedback. Could you take a few minutes to fill it out?
We’re still planning out 2025 and this survey will help us incorporate your feedback into how this newsletter improves in this calendar year.
But today we’re going to talk about why businesses fail and how not to be one of those businesses.
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Why BUSINESSES FAIL
You hear it all the time. 1/4 of businesses fail in their first year. After 5 years, 48% have failed. After 10, a whopping 65.3% have failed. But what does that mean?
Yes, business is hard. But the average failure rate doesn’t mean that’s your failure rate. And not all business types are made equal. Transportation is most likely to fail quickly (24.8% in year one) where as Mining is most likely to fail in 10 years (75.5%).
Wholesaling does well in year one (only 18.8% failure rate) but is top 3 in failure rate by year 10.
So, what makes these businesses different? And how do we set ourselves up for success?
Today we’re going to address:
- Industry factors that contribute to failure rates
- The top 12 reasons businesses fail
INDUSTRY FACTORS
Every industry is different and comes with its own challenges.
It’s important when starting a business to understand these factors. Some are obvious (such as cost to launch), but others are not so much.
So what are these factors and how do I combat them? Below I break down six common industry-specific factors to consider for your business, or any business you’re starting.
COST TO LAUNCH
Some businesses require little upfront investment, like selling your time in consulting, while others require a lot. In manufacturing, brick-and-mortar retail, or even building a software business (if hiring developers), startup costs can be high.
If the initial investment fails or has a short-term efficacy, then reinvestment could put you on a cycle of more and more money.
LONG-TERM CAPITAL INVESTMENT
This could go into cost to launch, but I wanted to give it its own separate category because reinvestment is often what’s missed. Maybe you have the capital to launch, but don’t grow large enough get escape velocity and procure the funds for reinvestment.
Growth could also be a problem here, as required reinvestment could make you poor in cash, leading to the most common reason of failure below.
SUSTAINABILITY OF A COMPETITIVE ADVANTAGE
Being a first mover can get you a quick win, but if you don’t have a sustainable advantage, creating a long-term sustainable business could be hard.
This can be especially true in industries that don’t require upfront capital because cost for new entrants is low. These will see your success and want to get some themselves.
OPERATIONAL COMPLEXITY
Consulting on your own can seem easy, but start managing a large team and maintaining that same ease is hard. Adding product lines or geographic regions also sounds great, but again… complexity.
If you don’t manage the growth well, profitability at year 10 can be much harder than year 1.
CUSTOMER ACQUISITION VS RETENTION
Early-stage businesses often focus heavily on acquiring new customers to build a revenue base, but long-term success depends on retaining those customers and building loyalty.
Writing a bunch on X/Twitter, I’ve seen a ton of “ghostwriting” agencies pop up and die because their customer acquisition was easy, but retention was hard.
If you don’t adapt and listen to your customer needs, you could be on an endless cycle of customer replacement, which makes growth extremely hard.
ECONOMIC CYCLE EXPOSURE
Launch in good economic times and it may seem easy, but not until the first economic downturn do you truly know if you have a sustainable business.
This is especially true in cyclical type businesses where you’re forced to learn how to reduce fixed cost, manage cash reserves, and prioritize the most important things to survive.
TOP REASONS
When we talk about the “top” reasons, I’m sure you have some general ideas what these might be.
But CB Insights did 111 post-mortems of failed startups and came up with the top 12 reasons for failure, which is what we’re going to use here.
When filling out the survey, they could choose multiple reasons, so we’ll explore here, also, how these reasons could interact.
RAN OUT OF CASH - 38%
Most businesses don’t give up until they can go on no longer. So for me, this being reason #1 was no surprise. The reality is that most business owners won’t give up until they’re forced to and that is when the bank account has emptied.
So, I don’t know that I’d call this a root cause, but is driven by other unsustainable factors in the business. You’ve either managed cash poorly, spent excessively, or not generated enough revenue for the required overhead.
There are many ways to combat this, such as cash flow forecasting, creating an emergency fund bucket, reducing expenses (to extend cash runway), or focusing on revenue growth.
These are all easy to say but hard to do. If they were easy, they’d be already done, right??
NO MARKET NEED - 35%
Every business is meant to meet a need, but sometimes you launch to find you don’t understand the need.
Market research, validation through customer feedback/prototypes, and adapting to the market quickly are all ways to to combat this, but sometimes you just miss the mark.
GOT OUTCOMPETED - 20%
Whether someone you know or someone you don’t, sometimes the competitor is just better. Whether that’s price, funding, or product will depend on your situation.
I was shocked to this high on the list because most don’t like to admit they were beaten, but I guess startup failure requires that humbleness.
Ask yourself: how are we unique from our competitors and industry? A unique value proposition makes you a solution for one where you can’t be competed against.
FLAWED BUSINESS MODEL - 19%
Businesses are started on assumptions. When those assumptions go wrong, money is lost.
Making mistakes in your business model is understandable, but often fatal.
The best financial models, as well as regularly tracking and measuring your metrics can help here, but sometimes the unknowns are too much and you miss the mark.
THE REST
- Regulatory/legal challenges - 18%
- Pricing/cost issues - 15%
- Not the right team - 14%
- Product mistimed - 10%
- Poor product - 8%
- Disharmony among team - 7%
- Pivot gone bad = 6%
- Burned out/lacked passion - 5%
The reality is that starting a business is hard. I’m a bit surprised that burned out/lack of passion is not higher, as the game is a grind.
And while many of these may be overlapping, one of these alone could sink the ship. But in reality, it’s usually more than one. Bad timing plus no capital means you’ll die. Bad timing plus lots of capital could give you time to pivot and find a better route. But if the pivot goes bad, you’ll blame the pivot and money (see how we keep coming back to money?).
What’s hard to capture in the data is that while the failure rate is high, how much of that failure rate is by the same people? I have to think the failure rate is driven by people trying things. And that if you’re someone taking more than one shot, your actual personal rate of failure is much lower.
That’s the ultimate trick in business: when is it time to give up and when is it time to preserver? That is an unanswerable question for anyone but you.
But know that we’re here (I’m here) rooting for you and can’t wait to see that success.
The goal today is that knowledge is power. Ask yourself:
- What industry factors do I need to be aware of and hedge against?
- What general failure reason am I most likely to struggle with?
By planning for these under-certainties, we increase our likelihood of success easy day. And that’s the root of why I write this: to equip you with more knowledge, which increases your likelihood of success.
I’m rooting for you in 2025.
