5 all-too-common reasons why entrepreneurs fail

Many employees leaving their jobs today are turning to entrepreneurship. The National Bureau of Economic Research says that the rate of applications for new businesses is higher than ever. And Felena Hanson, founder and CEO of coworking space Hera Hub, has seen a 50% surge in first-time entrepreneurs using her facilities.

While all this seems like good news, the failure rate of small business remains high: 20% fail after 2 years, 50% after 5 years, and 70% go under after 10 years.

But failure is not an entrepreneur’s enemy. It can be a wise teacher. Lak Ananth, CEO and managing partner of venture capital firm Next47, writes in his new book, Anticipate Failure, that “instead of fearing failure, become acutely aware of what could cause failure in your business or industry and build a tool kit for how to deal with it.”

Here are five things that can scuttle your business—and suggestions for avoiding or recovering from such failures:

1. FAILURE TO ASSESS THE MARKET

This is the single biggest reason businesses fail: 42% go under because there is no market for their product.

When I sold my first business, I felt so confident about my ability to be an entrepreneur—having had a 30-year track record of success—I launched a second company that provided emotional intelligence training for fitness instructors. During my hours at the gym, I saw trainer after trainer ignoring the client’s needs and not showing emotional sensitivity. The problem was: I didn’t test the market. Trainers, I felt, needed the services I was marketing. But they didn’t see the need. Nor did their fitness centers.

So, talk to prospective customers; find out if what you want is what they want. And find out whether those customers are willing to pay you an adequate amount for it. 

2. FAILURE TO BUILD A SUCCESSFUL TEAM

A second challenge entrepreneurs face is building a successful team. When that process breaks down, the business will suffer or collapse.

The best entrepreneurs surround themselves with amazing talent. Although some may see Steve Jobs himself as Apple, for example, he didn’t create those products on his own. He once said, “You’ve got to be a really good talent scout because no matter how smart you are, you need a team of great people. You’ve got to figure out how to size people up fairly quickly, make decisions without knowing people too well and hire them and see how you do, and refine your intuition . . . because you need great people around you.”

So, if you’re starting a company, as Ananth writes, “you have to build a team with a purpose in mind,” and they all must “help you get to that purpose.” You may start a business because you want to “be your own boss.” After all, 55% of entrepreneurs say that’s the reason for going out on their own. But if you don’t surround yourself with good people, you’ll end up being a sole proprietor at best. 

3. FAILURE TO CREATE A DISTINCT PRODUCT

A third challenge for entrepreneurs is creating a product that is differentiated in the market. Without that, the business will fail.

Richard Branson founded a soda company that few of us know about because it, well, fizzled. In launching Virgin Cola, Branson had high hopes: “Coke is the best-known brand in the world,” he said, “and if we could topple Coke, we thought it would be a lot of fun.” Unfortunately, his product did not sell because it was too similar to other sodas in the market. The company folded after a few years.

You must have a product that is distinct. I built my first business, the Humphrey Group, because no other company was offering what I knew I could provide: executive speech training that taught C-level clients how to create and deliver their own speeches, presentations, media remarks, and off-the-cuff comments.

4. FAILURE TO GET THE TECH RIGHT

A fourth problems comes from failing to get the technology right.  This too can foil your chance of success.

Elon Musk has had his share of technology failures. The first three rockets SpaceX launched exploded. It took him years to iron out the kinks at Tesla, and then further challenges came in trying to ramp up production. And during an unveiling of the Cybertruck model, his designer hit the window with a sledgehammer, and to Musk’s surprise the window shattered.

Musk has succeeded extraordinarily well, but he certainly was prepared for failure. He once said, “In the early days, I thought there was more than a 90% chance that both SpaceX and Tesla would be worth $0.” And he recently sent his SpaceX employees a memo warning that the company might go bankrupt.

Musk has shown persistence in overcoming his technology failures by demonstrating a willingness to analyze problems, and a determination to constantly improve.

5. FAILURE TO FINANCE YOUR BUSINESS

A fifth serious problem entrepreneurs can face is failure to financially sustain their business. To put it simply: It costs money to run a business, and if you don’t have it, you’ll fail.

While good products and loyal customers will—eventually—allow your business to thrive, in the startup phase, you’ll need adequate funding and a sharp eye on all expenses. I started my first business in a closet-size office, and as one Bank CEO jokingly said, my two coffee mugs were my first assets.

I continued to keep costs down wherever possible: I hired trainers who worked on a per diem rather than a salary basis, had only one company event per year, and my husband did the accounts. I’ve seen too many businesses begin with high salaries and lavish expenses, and soon close their gilded doors.