With so many startups that have launched in the past decade, did you know that only about 50% survive for five years and up according to the Bureau of Labor Statistics? In fact, the Bureau also found that out of all the small businesses that launched in 2011, only 4% made it to their 2nd year, and only 3% made it to five years.
According to a study by the Indiana Small Business Development Center, the most common reasons startups fail are mostly caused by incompetence, lack of experience in management, business issue (e.g. fraud, neglect, disaster), and lack of experience in the line of products or services. These causes are usually too major to solve or simply out of an organisation’s control.
Is there a way to prevent all of these beforehand? Take a look at your startup and see if you can relate to the following situations below. Here are five early warning signs that your startup is failing.
You don’t know your market.
Finance and investment firm CB Insights’ study on the reason why startups fail found that 42% of the study cases admitted that a lack of market demand is a major contributing factor. This lack of demand is due to the fact that many businesses eagerly put their product or service to the market without doing a proper market research first.
Unfortunately, this is quite a common mistake that 26% of businesses make, according to a survey by market research firm Attest. Even though 75% of the respondents said they do not understand their market, 35% still said that market research is unimportant.
On the importance of market research for businesses, Jeremy King, CEO and founder of Attest says:
“New technologies in market research and consumer insights are unlocking new relevance to many companies, but there is clearly a long way to go until all companies can use the power of research regularly. Hard to reach consumers like millennials are becoming so much easier to engage and understand, if companies can just approach these traditionally tricky demographics with the right tone and through the right channels.”
In an article by Infoholic Research, Arema Connect CEO Pat Keogh said that market research plays an important role in all business decision-making, from sourcing new suppliers to reaching international markets and potential clients. Gathering necessary information on your target market will help you analyse your business’ strengths, risks, and opportunities.
If you’re struggling to sell your product or service right now, you may want to rethink and understand your market a bit more.
Your staff’s skills are not up to par.
Building a well-rounded team of highly-skilled members gives your business a higher chance to stay afloat.
In a report by UK recruitment service Robert Half, hiring the wrong or low-skilled employees result in these three consequences:
- Lost productivity
Investing in the wrong person equates to wasted time and resources. Over time, this only affects the team’s overall performance. Other staff members may have to take on a low-performing member’s work and in turn affect their own performance as well. Inevitably, it will be more difficult for your team to maintain standards and produce better work.
- Lower staff morale
A low-performing member can also affect the team’s morale. Having members suffer from a colleague’s incompetence can cause tension and possible conflict within the team. One member’s attitude can cause a ripple through the whole group and this can affect your team’s motivation to work and stay in the company.
- Monetary costs of finding a replacement
Replacing a staff member is a long and costly process for businesses as it takes time to scout the right talents, carry out interviews, and onboard new hires. New hires can also take time getting used to which, in effect, can delay progress.
These consequences show how crucial it is to hire the right members for your business. If you currently have underperforming members, try to invest in trainings and see if they can improve. Otherwise, it may be best to build a new and better team. If your vision is too big for your staff, you may not make it too far.
Your communication sucks.
Workplace collaboration produces creativity, innovation, and engagement, but it is often ignored by organisations. Unfortunately, 57% of projects fail due to lack of communication, according to a survey by IT Cortex.
In addition, 75% of employers say that collaboration and teamwork is important based on another study by the Queens University of Charlotte. However, the study also says that only 18% of employees get evaluated on these during performance reviews. In another survey by the same university, they found that 39% of the survey respondents say that people in their workplace don’t collaborate enough meaning communication isn’t properly encouraged and practised in the workplace.
Without communication, there can be no proper collaboration within a team, and between teams. It is crucial for teams to seamlessly work together to bring the company forward. To encourage better collaboration within your business, include communication trainings especially among managers. Collaboration tools such as Slack and Asana are also a great help in centralising collaboration among teams and members of the organisations.
A high turnover rate.
Staff come and go in businesses, however, when employees leave your company only after a short period of time, that is an alarming sign that your startup might be failing. This is a sign that your employees are encountering problems that need to be addressed.
A Harvard Business School study found that high turnover rates affect the business in terms of profit margins and customer service. If you calculate the cost of losing a staff member, it would amount to around $6,000 for regular employees, and about $9,000 for management staff, based on a report by the Chartered Institute of Personnel and Development. This means that having employees come and go causes a significant monetary loss for your business.
In Dr. Stephen Covey’s book The 7 Habits of Highly Effective People, he writes that the difference in productivity between highly motivated and poorly motivated employees is around 500%. With this high figure, it makes sense to invest in employee engagement to improve and maintain employee retention.
Remember that a company’s greatest strength is its people. Know what makes your staff happy and learn to value their contributions.
Your burn rate is higher than your growth.
If you’re spending more money on your business than what you’re selling, it’s a clear sign that your startup is failing.
Entrepreneur Mark Suster said:
“The main reason to know your burn is to arrive at a quick calculation of how many months cash you have before you run out of cash. Usually when an investor is asking you your burn rate he or she is referring to net burn— what cash you are consuming.”
A high burn rate suggests that a business will likely enter financial distress at a faster rate. It also suggests that investors would have to strictly set deadlines and would be required to put more money into the business before it generates revenue.
To reduce your startup’s burn rate, you would have to find a way to reduce expenses or spend more on marketing and advertising to reach more consumers and close more sales. Find the areas you need to improve on and avoid overspending so your startup won’t have to raise funds (which is also not a good sign) to keep afloat.
Related Article: 10 Business Ideas You Can Start From Your Laptop
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