Knowing the biggest risks that most commonly cause new startups to fail could make the difference between whether your own business sinks or swims.
Whether it's bad luck, bad timing or a half-baked business model, there are any number of ways a startup can go wrong. And roughly 20% of new businesses fail within their first year, according to data from the U.S. Bureau of Labor Statistics.
Luckily, some new research can shed some light on the biggest recent obstacles that have thwarted startups.
Skynova, which makes invoicing software for small businesses, surveyed 492 startup founders in November 2022 and analyzed startup data from CB Insights for the new study that looks at the most common reasons behind startup failures in 2022.
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- Lack of financing or investors. The study notes that 47% of startup failures in 2022 were due to a lack of financing, nearly double the percentage that failed for the same reason in 2021, based on CB Insight's data.
- Running out of cash was behind 44% of failures. While that can be the result of poor financial planning, it can also point to a dearth of available funding.
Capital issues aren't surprising, considering that fears of a potential recession, among other factors, have caused investments in North American startups to plunge 63% in 2022 compared to the previous year, according to a recent Crunchbase report.
Anyone looking to start a new business in 2023 might face similar obstacles to securing funding, so long as economic uncertainty persists.
- The impact of the ongoing Covid-19 pandemic. While 33% of startup failures were attributed to the pandemic's wide-ranging effects on business and the broader economy, CB Insight's data shows that number was down from 59% a year earlier — a sign that many small businesses recovered from the worst of the pandemic in 2022, even as some continued to struggle to return to normal.
Startup success advice from founders
While no entrepreneur can guarantee success, the founders surveyed by Skynova had plenty of advice to offer to anyone looking to take the leap and launch their own business.
When asked what they wished they'd done differently when starting their own businesses, 58% of the founders polled said they would have done more market research prior to launching. The same percentage said they wished they had put together a stronger business plan.
That's in line with advice from the U.S. Small Business Administration, which notes on its website that a solid business plan is central to your startup's success and can function "like a GPS for how to structure, run, and grow your new business."
Also extremely important is the ability to think on your feet and make necessary changes should your plans not work out as well as you'd hoped. When asked for their top advice to aspiring founders, 79% of those surveyed by Skynova told those hopeful entrepreneurs to "learn from your mistakes."
It seems they speak from experience, as 40% of the founders polled said they had previously pivoted their startups in some fashion to avoid failure. And 75% of them said pivoting helped lead to success.
The most common types of pivoting noted by the founders were making changes to their business plans and either launching a new product or improving upon an existing one.
Realizing your startup is on course for failure and successfully pivoting to avoid disaster is a skill that any successful entrepreneur could use. Indeed, a failure to pivot is one of the most common reasons that startups fail, according to CB Insights.
"Shark Tank" investor Kevin O'Leary previously told CNBC Make It that his own money-losing investments often have the same thing in common: startup founders who either can't, or won't, make changes when necessary. In many cases, those founders simply refuse to admit that their original business plan needs updating in order to survive.
"They can't get out of their own way," O'Leary said. "They won't listen to anybody else."
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