Ever wondered why most businesses fail? Here are the most common reasons!
Everyone dreams about being their own boss, but only a few understand why other businesses failed before them.
Many of you are starting businesses or are already running them, that’s why the interest in increasing your chances of success is becoming a priority.
It makes sense to study what others did wrong in the hopes of avoiding it, that’s where we come in.
We put together a list of factors that impact why new companies never really get of the ground as well as resources for you to look into the matter.
If you don’t feel like reading here’s the video version of this article:
Here are the 15 most common reasons why business fail:
Number 1: No competitive advantage
It all sounds cool and exciting, you’re gonna launch a business, you see them all around you so you think to yourself, why wouldn’t I be a successful entrepreneur. I have plenty ideas, I can figure this out.
You borrow money from the 3 Fs, family, friends and other fools & open up a coffee shop on your street.
3 months later, a brand new Starbucks pops up 1 block away from you and you don’t think much of it.
But less people are coming in, you try selling all kind of things in the store just to supplement the income because your rent doesn’t care that people want their frappuccinos not you generic lattes and in 6 months you close it all down, losing money and putting a strain on your relationships.
It’s easy to blame your failure on the faceless corporations that are slowly taking over the world, when in reality, you have no differentiators. You were selling something people could’ve bought anywhere else, you didn’t approach the issue in an innovative way, you didn’t leverage new resources others didn’t.
This is even more accelerated in the online space, where you’re not only competing against the people in your area, you’re competing against everyone in the world who’s coming after your customers.
Legendary CEO Jack Welch put it best when he said:
“If you don’t have a competitive advantage, don’t compete.”
We recommend you pick up his book called WINNING and as long as you’re in business re-read it every 18 months. You get an inside look at the 40 year lessons one of the most prominent CEOS of this century has leaned and implemented.
Number 2: No strategy
We were never the business plan type of entrepreneurs but we always understood what the plan for our business was. You need to know where you’re going and what steps you need to take.
If I do this -> then I can do that -> and then we can expand into this.
It’s all a chain process.
Everybody calls it strategy and without it any business is doomed to fail.
Your strategy is what allows you deal with the market, with how you behave in times of prosperity and in times of crisis.
It’s the foundation of all your decisions and it allows you to keep track of how well you are performing.
The most popular book on strategy is Good to Great by Jim Collins.
Number 3: Poor understanding of market needs
One of the simplest things to do that lead companies to failure is they ignore the customer. This might sound counter-intuitive, but you’d be shocked how wide-spread this issue is.
Listening to your customer is an invaluable practice that allows any company to mature, learn and adapt.
Customers are constantly offering feedback and suggesting what they would need in order to better fulfill their needs.
Always keep the customer in mind and based on his problems you can generate valuable products.
Probably the most interesting story on the topic is the one of how Starbucks almost collapsed by assuming what they’re customers wanted and not focusing on what they do best. You can hear the story from the man himself, Howard Schultz in his book Onward or if you’re thinking about how your customers feel, read The Starbucks Experience: 5 Principles for Turning Ordinary Into Extraordinary by Joseph Michelli.
Number 4: Wrong partners
Partnerships are always difficult, especially when the founders complement each other but grow to have different drives and priorities.
As humans we are complex beings, our desires and focus shifts as time goes on influenced by an array of variables.
Imagine being a year into a project and finding out your partner no longer feels the same fire you do about this business, or he simply has a different idea of what the business should look like. You both go your separate ways and both your likelihood of success go down the drain.
And that’s the mildest of the outcomes.
Talk to any venture capitalist in Silicon Valley and they’ll tell you crazy stories about founders stabbing each other in the back in order to take the upper hand. Even the most famous companies have similar stories.
The founders of snapchat kicked out the 3rd cofunder when the business started doing well. The entire case ended up in a 157 million dollar settlement.
It’s hard to go at it alone, but if you can, we recommend it.
Number 5: Lack of business acumen
To be honest, some people have more of a sense for business than others, the same way some people are better at drawing or poetry.
Business is basically math that you do for profit.
This is also one of the reasons most people go broke or end up being poor, they’re bad at business, where the business is yourself.
Understanding how much it costs to run a business, how much each employee needs to generate in order to sustain their own job-position, all that leads into how much you price your products or services.
The more businesses you study and understand the better you will able to connect dots and take advantages of opportunities coming your way.
The good news is, you can develop your business skills if you choose to.
A couple of years ago, we read The E-Myth Revisited by Michael Gerber. It’s a book on why most businesses don’t work and what to do about it. In it there are great lessons about why some people find it difficult to switch from being an employee to running a business. We recommend the book to anyone who’s just now starting their first business.
Number 6: Lack of a vision
Most companies that survive have a long term vision, they know where they’re headed and what they’re looking to become.
This vision is brought on by the early team and it’s used as the north star for the business journey.
Most people get this wrong, despite it sounding simple. They all think world domination, or being the most profitable company in the world, but these are macro-measurements.
Instead of spewing out 1 number and running with it, work a little big backwards from it.
What does it mean to be a billion dollar company? How many customers do we need, How much product do I need to sell? How many employees will it take? What kind of infrastructure will be in place, how many geographies, how big am I today, What is a realistic growth rate we can achieve to close in on our north star?
Once you start digging in a bit, the vision gets clearer and clearer.
For this point we’ll recommend the already classic: Start with WHY by Simon Sinek. If you and your employees don’t understand the reason why the vision is put in place, you’re unlikely to make it.
Number 7: Micromanaging
A 1 person business doesn’t make you a boss, you’re the only employee of a company you’ve just formed.
Basically you’re still an employee, but now you’ve got way more things to take care of and you’ll be paid a lot less.
Eventually you’ll bring the first person in.
The biggest temptation you’ll face when hiring your first employee will be to micromanage everything he or she does.
You’ve been accustomed to doing things one way and paying the at most attention to detail as possible.
Here’s some brutal truth almost nobody cares to admit:
None of your employees will work as hard or care as much about the business as you do.
And that’s a fact.
The goal here is to train your employees in a way that they can improve themselves in time. Set the guidelines, point them to your north star and then give them the freedom to not feel like machines in an assembly line – unless you’re running a literal assembly line where you can’t afford robots.
Number 8: Not hiring the right people
Finding the right people is almost a form of art, you need to have a certain Flair for it.
A valuable employee will help you grow a business, a couple of them could help you navigate even the most dangerous waters, but to keep this boat metaphor alive, a bad employee is like having a whole in your boat.
It doesn’t matter how hard your rowing, you’re still gonna drown.
So how do you find the right employees?
There are a bunch of books out there talking about how to prospect, analyze, create systems for hire, vetting processes and more. Most of these books are aimed at large corporations with hundreds and thousands of employees, so they’re probably not the right recommendation for you.
So we looked at our own situation and asked our entrepreneurial friends about the hiring process we came around to a golden rule, that seems to apply to all our businesses. And that is:
Hire people that are smart enough to know when they don’t know something & who have the ability to learn, that want to go on a long journey with you.
That’s basically the gist of it. You want people who understand what you’re asking them to do, not just repeat the same process.
These people will earn more, because they are able to provide you with additional value by saving you time, instead of constantly needing to be hand-held.
One thing we want you to remember that’s incredibly valuable:
Employees can not read your mind! You can not hold someone accountable for something you didn’t take action to train and correct.
Number 9: Lack of capital
If we were to ask most of you what is the main reason why you don’t have a business, probably the majority of you would’ve said: lack of money.
It’s understandable to some degree, that you believe you need large amounts of money in order to start a business, but that’s an excuse lazy people push forward in order to justify their lack of effort.
Money is never an issue when you have time and skill.
Because you can always trade in that combination to earn more money and then deploy it in your business.
Most wanna-be entrepreneurs fantasize about somebody coming up to them and giving them a large sum of money for them to play around, you might even be one of them.
The truth is, it’s easy to make more money when you already have money, the true differentiator from the REAL and the Pretenders is to make money when you don’t have any.
Lack of capital is never the main reason why businesses fail. It’s usually poor management of the existing resources, the idea is bad, the implementation is bad and so on.
We were looking to recommend a book or resource for this one, but to be honest, the best recommendation is cut down some of your sleep hours and figure out how to obtain the necessary capital by working projects or side-gigs while you’re building your business.
This should be a very short-commitment to get that initial ball rolling and then it’s up to you to manage those funds.
Number 10: Scaling too fast
We talked about not having money, now it’s time to talk about having too much money on your hands.
This is why a large start-ups fail.
Here’s a story. Let me know if it sounds familiar:
Company X raises a large amount of money, the celebrate and then start hiring a bunch of people. They were not turning a profit, but had a long term vision in the same way that Google did.
They even get some media coverage and people speculate they might be onto something.
Investors are interested, but are suspicious about the team, the product and their lack of revenue. Crazy numbers are thrown around the company’s valuation.
3 years later, you hear the company is closing down, filing for bankruptcy and laying off hundreds of employees.
For every Google or Amazon that made it, there are thousands of companies that died trying to do the same thing, only they didn’t have the chops to grow sustainably, instead, they put too much gas on the fire until the entire place burned down.
Not every business is meant to be a large multinational, with thousands of employees. The more people there are to manage the higher the chance that things spin out of control.
The smart trend in businesses is staying as small as possible, this gives companies the ability to adapt and reinvent themselves quickly. Scaling up too fast might be the end of your enterprise.
One of the best books of 2019 is focused on exactly this topic. It’s called The company of one by Paul Jarvis. It’s perfect for young entrepreneurs or freelancers looking to grow into a company.
Number 11: Not adapting quick enough
Speaking of your ability to remain nimble and adapt quickly.
If you’re unable to read what’s happening with your business, to understand how things are going and more importantly WHERE things are going in the industry you’re in, you might be left behind.
Some people just don’t see the change coming and that’s how you end up with the Blockbusters of the world.
Never before in the history of commerce did we have this fast of a pace when it comes to innovation & shifts in customer behaviors.
Individuals, no longer have a single career their entire lives, instead they need to reinvent themselves constantly.
The same thing happens with companies.
Google started as a search engine, then became and advertising company, then a technology company that’s pushing out smartphones & tablets.
Apple started out as a computer assembler, shifted to the ipod, then the iphone, now it’s generating a large portion of it’s revenue from dongles and accessories to it’s on product line, it’s investing massively into media content to compete with the likes of netflix and next year they’re supposedly releasing their own electric car.
And these are mammoth companies, they’re not as agile as you can be. Start being open to reinventing your business, otherwise you might get crushed.
Number 12: Inability to sell
Cashflow is the oxygen of any company. As long as you have money coming in, you’re alive.
The problem most first time entrepreneurs have is that they think if they build it, people will be rushing over to purchase what they’re offering.
The reality hits you like a brick in the face once you realize nobody care what you’ve built, even if it can help them.
Everybody is bombarded by people wanting to take their money away from them in a way or another and you’re just another one of that crowd.
Selling is the art of telling compelling stories, that simplify the benefits your products or services have in someone’s life.
The better you are at telling stories, the more oxygen you can feed your business and the longer you’ll stay alive.
For Sales: there are a bunch of them, off the top of our heads: the 80/20 of sales and marketing, leverages the Pareto law to get more sales with less effort.
Number 13: Trying to do too many things at once
It’s super easy to get distracted by all the shiny opportunities around you when you have an entrepreneurial mind.
“We’re gonna be a software company, but we’ll also do hardware & merchandising & licencing and SEO & Pay-per-click & social media marketing..”
Find one thing that work for you and get really… really good at it. Only once you’ve hit a growth ceiling in that regard you can slowly branch out to what makes sense for your business.
This is a constant problem for most companies and it leads to the dilution of the vision, we had to deal with is as well when we were growing and it took us taking a step back and looking at the company objectively.
If you try to do too many things at once, you’re neglecting what’s actually important and it’s hurting your chances of success.
A great resource on this topic is a book called: The One Thing. It helps you focus your actions to achieve extraordinary results in a particular field.
Number 14: Failure to use the resources at hand
Believe it or not, most businesses fail, because the entrepreneur is too lazy to learn how to make the most out of the available resources.
The internet has democratized opportunity and the access to valuable information.
You can no longer say, that information is reserved for the elite or a select group. You’re reading this article right now, learning the lessons of some of the biggest companies in the world.
A book costs 20 to 30 bucks and you get to learn from some of the greatest minds to ever live, or you can even get it for free if you’re that strap for cash.
We love Gretta van Riel’s example of starting 5, million dollar plus companies, one after the other just by using shopify and instagram.
Not many of you know this, but shopify has this incredible library of free content with strategies, interviews and training of how to leverage the internet to build a business.
You can access it if you go to alux.com/shopifyacademy
There’s nothing to buy on that page, so enjoy the free value you didn’t know about, before now.
Number 15: Lack of passion for the business
The last thing on our list is the passion for what you’re doing. You have to love it!
That’s why people always say: don’t do it for the money!
If you don’t love it, if you are not obsessed with it, you’re gonna fail.
Times will get hard, problems will arise, you will want to quit a million times.
If you don’t love it, if you don’t have the passion for it, you will quit! Any reasonable person would quit. Why would anyone put up with all the bullshit that’s coming their way, unless they loved it to the bone.
Entrepreneurs look at things differently, they get involved in their business because they actually care about the product, about what they are building and the problem they are solving.
Be careful of everything we’ve mentioned in this list, because it’s enough to have 1 whole in your boat in order for it to sink, not to mention all 15.
We really hope this article helped expose some of the vulnerabilities in your own projects and hopefully, you’ll take the necessary steps to improve your odds of success.
It would be really valuable if you could share in the comments one of the difficulties you’ve encountered in your business. The unknown value comes from our community who’s got extensive experience with situations like yours. Share your struggles with them and we’re sure they’ll provide some valuable insights.