If you’ve even considered starting a business, you’ll have heard the statistics: four out of five new businesses fail, 90% of startups don’t make it past the first year and so on. While determining how much truth there is to such stats is not easy, the sentiment is clear – starting a new business is hard.
Whatever the exact number, it’s not a stretch to say that the majority of startups fail. Rather than be disheartened by this, it presents an incredible learning opportunity. By digging into the reasons behind these failures, as CB Insights did earlier this year, we see that many startups go out of business for the same reasons – be it poor cashflow or bad planning. So, if you’re looking to launch a business, learn from the mistakes of others and avoid these five common startup pitfalls.
Common startup challenges – and how to avoid them
Insufficient funds and poor cashflow
Many banks are reluctant to lend money to entrepreneurs without a proven track record of success. Because of this it can be extremely difficult to raise the necessary funding to start a business. The need for adequate funds cannot be underestimated, however. Nor can the importance of accurately estimating early costs. Many entrepreneurs fail to do this. A 2016 survey by Geniac found that, on average, entrepreneurs miscalculate these costs by around USD 2,500 (AED 9,200). The consequences of this mistake? Around a quarter said they suffered losses, 21% had to readjust growth targets and 7% were forced to let staff go. The implications can be far worse – CB Insights’ research shows almost a third of failed startups shutter because they run out of cash.
How to avoid it:
Undertake thorough research into every cost that may arise during the early stages and make sure you have adequate funds to cover it. This includes directs costs such as materials and paying staff, and indirect costs like HR, accountancy, company formation and licensing fees. If possible, factor a buffer of three to six months operating costs into this estimate to cover any unforeseen outgoings that may arise.
The journey to startup success is paved with pitfalls and obstacles, and the only way to give yourself a fighting chance of overcoming them is to plan for every eventuality. Many of the top 20 reasons for startup failure according to the CB Insights survey I referenced earlier can be put down to poor planning – no market need, poor marketing, bad timing, no business model, and so on. Benjamin Franklin was right when he said: ‘By failing to prepare, you are preparing to fail.’ And this is never more true than when launching a business.
Benjamin Franklin was right when he said: ‘By failing to prepare, you are preparing to fail.’
How to avoid it:
The best way to avoid this one is planning. Thorough planning. If that answer seems obvious then you’ll likely be surprised at just how many businesses are out there without an adequate plan or strategy in place. The statistics are as abundant as they are shocking: studies have shown that 26% of UK SMEs have no business plan in place while 75% of companies operate without a comprehensive marketing strategy. Before you launch your startup you need a clear and accurate plan detailing how your business will operate, including how you intend to market and sell your product or services. If you don’t have these in place now, you’ll soon find out how hard it is to implement such plans on the fly.
Strain on relationships
Working to secure the success of your business is often only half the battle. You also need to secure the success of your relationships too. Marriage.com reports that the divorce rate among entrepreneurs is 5-10% higher than normal, and this should come as a surprise to no-one. Launching a startup is a lonely existence, consisting of late nights, long hours, financial insecurity and plenty of stress. This takes a toll. A recent Harvard Business Review study of over 300 entrepreneurs found that most had suffered some level of burnout – with 25% moderately burned out and 3% strongly burned out. As well as the having an impact on both physical and mental health, any amount of burnout – which can cause fatigue, isolation and short temperedness – can put untold strain on a relationship.
How to avoid it:
Stress is part and parcel of launching and running a business. It can’t be avoided. However, burnout, and the strain it places on our health and relationships, can be. Richard Branson believes the key to avoiding burnout is to develop a routine that works for you and ditch the guilt associated with stopping working. These tips can help to avoid strain on your relationships too. Only by compartmentalising work time into a set schedule and switching off that nagging feeling outside of these hours can you truly focus on the happiness and wellbeing of those around you.
In the early stages, it’s not uncommon for the lines between business and personal to become blurred. When it comes to liability it pays to make these lines as clear as possible as soon as possible. The implications of failing to draw a clear distinction between you as an individual and your company can be huge. Not only could you be left open to lawsuits and compensation claims should your business run into any legal trouble, but as you and your company are not considered separate entities, you could face severe financial costs and potentially even bankruptcy should your business owe money to creditors, or ultimately fail.
How to avoid it:
When you establish your business, be sure you understand the level of liability you are exposed to. If you set up an LLC for example, your liability is limited to the amount of your share capital, whereas the owner of a sole proprietorship would have unlimited personal liability. You also should ensure that both you and your business have adequate insurance to protect against any legal claims that could be made against your company.
When you establish your business, be sure you understand the level of liability you are exposed to.
Overly ambitious ideas
You may be thinking ‘What’s wrong with an ambitious idea?’ Well, nothing, per se. The problem arises when the sole focus of your startup is that ambitious idea. Ideas alone are useless. They need to be executed to have any worth – and if you remain steadfastly committed to an overly ambitious concept, the chances are you’re going to struggle to find a team or a strategy that can successfully put it into practice. This leads to frustration, wasted time and resources and ultimately failure.
How to avoid it:
You’ve had the Eureka moment. That’s great. But don’t get swept away in grandiose ideas. Instead create a Minimum Viable Product and focus on the most effective way to get that idea to market. Then over time, if it’s feasible and the market need is there, you can move towards building your dream concept. Look at Facebook. They didn’t set out to connect over a quarter of the world’s population from day one. They built a simple tool to help students communicate, then over time they tweaked their offering and expanded to become one of the world’s biggest media companies.
There’s a reason why over 20,000 new businesses opened in Dubai alone last year – because the potential rewards are huge. But no reward comes without risk. This can’t be avoided. But it can be mitigated against. By learning from the mistakes of the past, you can enter the world of the startup with your eyes wide open, ready and waiting for the challenges listed above and armed with the tools to overcome them.
Setting up your own business has never been easier. Virtuzone takes care of it all so you can focus on what matters – building your business. For more information about company formation in the UAE mainland or free zones, please call us on +971 4 457 8200, send an email to email@example.com, or click here.