10 mistakes start-ups make and how to avoid them
According to the Government, in 2019 672,890 new companies were registered in the UK. The following year the number was even higher, with a record 770,000 new businesses being launched.
The UK ranks at number two in the world for being one of the most innovative countries for start-ups, after the US, according to a report by the Global Startup Ecosystem Index. The UK ranks high for foodtech, e-commerce and retail technology and marketing and sales technology.
Despite this positive data, 20% of start-ups fail in their first year, 30% in the second and over 50% don’t make it past their fifth operational year.
There are a number of reasons why start-ups don’t succeed, but the most common, according to research by CB Insights and investors are lack of funds, no market demand and no businesses plans. So what are the reasons why start-ups don’t make it?
1 – Lack of funds
Start-ups are often set up with the founders’ private money, crowdfunding, investment from family and friends and loans. Not foreseeing the amount of investment needed to take a company off the ground, mismanaging funds, not budgeting properly, overspending, and failing to secure investment to scale up are all reasons why start-ups run out of funds.
2 – No market demand
Start-ups are always the product of a great idea, but for every Amazon, Facebook, Beyond Meat and Apple, there is a very large number of new companies that doesn’t make it and dissolve quickly. A eureka moment is of course a good place to start a business, but thorough research is of the essence. Is there market demand for that product or service? Without market need, start-ups have nobody to sell to, so independently of whether an idea is good, there has to be a demand for it. Some start-ups have simply failed because their proposition was ahead of their time. Market demand and timing are of the essence for a start-up to succeed.
3 – No interest from investors
It’s not easy to secure investment from venture capital companies and angels, but often start-ups don’t get a financial backing simply because they pitch to the wrong investors, or fail altogether to get the opportunity to pitch to them. Researching and finding the appropriate investment companies interested in the start-up’s proposition is key to getting funding.
“Know your audience”, advises Gil Horsky, Director of Innovation SnackFutures, the innovation and venture hub from Mondelēz International. “When pitching a start-up, I always recommend entrepreneurs to learn carefully who is the audience they are pitching to – are those VCs, CVC or Angels? What is their key investment thesis (investment focus areas, stage etc.…), and why is your venture a good fit to their investment thesis?”
4 – Internal team issues
A well-balanced team with a diversity of skills and clear, well-defined roles are very important for a start-up to succeed. Investors are unlikely to part with their money if they sense a new company has internal fractures, disharmony or lacks essential skills needed in business it wants to enter into.
“What we look for in a pitch is a well-balanced team that has experience in the food industry, technology and entrepreneurship“, says Good Seed Ventures Founder and Managing Partner Frank Cordesmeyer.
“One of the founders needs to have a technical background and ideally one or more of the founders have already scaled a start-up. During the pitch, the founders need to be able to communicate their vision in a clear, confident and empathic manner. When listening to the pitch most of our attention is directed at how the founders communicate with each other and the audience.”
5 – Unclear business plan
Researching and putting together a business plan that works for a start-up is essential. New companies should not leave anything to chance and be clear about how the company operates, what it sets out to achieve and how it’s going to do that. Start-ups need to be clear about their scalability, the market they are entering and their competition. They must also have a solid financial plan and revenue projection.
6 – Lack of focus and motivation
Lacking focus and losing motivation will send a start-up on a fast track to failure. Passion, motivation and belief in the business are key to success. If a start-up doesn’t believe in itself, why would anyone else?
“There is nothing more important for investors than meeting an entrepreneur that has her/his passion shines through, and conveys their strong belief in their venture, and in their ability to execute successfully“, says Gil Horsky. “That being said, passion should still be grounded in capabilities, facts and reality.”
7 – Competition
Many start-ups go out of businesses because they are outcompeted. Researching competitors, being knowledgeable about the market share, staying at the forefront of technology and new solutions in the sector the start-up operates in and listening to customers are all essential in order for the business not only to survive, but to thrive.
8 – Pricing and costing problems
To scale into profitability, start-ups need to be clear and honest about their pricing and costing. If they under-price their product they will never be able to cover their costs or make a profit; if they overprice it, they risk being outcompeted, and alienating existing and potential customers, and of course, investors.
9 – Poor marketing
It’s good and well for start-ups to have a fantastic product on their hands, but if nobody knows about it the business will never take off. Poor marketing is one of the reasons start-ups fail, so a solid marketing strategy and budget is of the utmost importance.
10 – Legal issues
Legal issues are common reasons for the demise of a start-up. From being unclear about how the equity is split among co-founders, their roles, assets and investment they bring to the business and salaries, to the legal way a business operates as a company (is it a limited company or a corporation?), trademarks, domains, licences, tax and stocks considerations, return to investors and employees’ contracts to name a few, legalities – whilst perhaps not the most exciting side of setting up a start-up – must be clear and taken care of right at the beginning to avoid costly legal mistakes, or worse, later on.