Nobody sets a business up to fail. On average, 20% of new businesses fail within their first year in the UK, and as many as 90% fail globally. Knowing how to spot the early warning signs and having the tools to turn things around can help new entrepreneurs navigate uncertain waters and turn a sinking ship around.
While there are many reasons startups fail, the first step is acknowledging there’s a problem. Low sales or revenue are a big indicator of a poor start to business, but by this point, it can be too late. Acting upon early red flags can help you turn things around before it’s time to close the doors for good.
What is a Startup?
A startup is a new, usually small business with little to no capital to start with. Capital is usually found through family and friends, business loans, or investors. Startups are usually innovative businesses started by entrepreneurs to disrupt industries and create change.
What are the Early Warning Signs of a Failing Startup?
While early warning signs can be worrying, they don’t necessarily mean you need to call in the insolvency practitioners straight away. Spotting these indicators can help you make the right changes to ensure success. Some of the key early warning signs are:
Not understanding your target market
If you don’t understand your target market well enough, you won’t understand how to communicate with them. This can mean your product or marketing may not hit the mark with customers. For a product or service to be successful, it must meet a need or solve a problem for the customer.
How to turn it around:
- Do your market research. Is there an identifiable group of people who would want to buy your product or service? Is this group large enough?
- Learn your customer’s demographics: what drives them, what their pain points are, and how to reach them.
- Look at the competition. How is your product or service better?
- Are you reaching your audience at a local level? For example, if you’re in the San Fernando Valley in LA, do you use an 818 area code or a national phone number? Local area codes can help you connect with customers better as they feel like they’re dealing with a local company.
Lack of funds
Running out of money is one of the main reasons startups fail. Not having enough money to operate can stem from poor cashflow forecasting, management, or a lack of research into costs vs sales. You’ll need money to develop the product or service, hire staff, rent premises, and market the product for as long as it takes to turn a profit.
Understanding and managing transaction disputes effectively is essential, as unresolved chargebacks can deplete your financial resources unexpectedly.
How to turn it around:
- Careful financial forecasting. You’ll need a thorough and realistic plan of how much the business will cost to run on a day-to-day basis, and how much you may need to generate for future investments.
- Research financial products that can help with cash flow, such as business loans and credit cards.
No customer traction
No customer traction means you’ve failed to connect with your audience. This is a major red flag for startups because it can mean several things. Perhaps your marketing isn’t working for you, or your product isn’t solving a problem.
How to turn it around
- Go back to the beginning. Look at your product and market research. Are there any tweaks you can make to make the product more desirable?
- Look at your marketing strategy. Are you visible where your audience is likely to see you? Is your brand and messaging right for your audience? You need a marketing strategy B2B (or B2C depending on your market).
- Get feedback. Surveys or focus groups can help you understand why you’re failing to attract customers.
Too much focus on vanity metrics
We all get excited when a social media post gets more views than normal, or there’s a boost in new followers, but while these metrics make us feel good, they don’t always equate to sales. The danger here is that vanity metrics can feel like success when they aren’t generating revenue.
How to turn it around
- Pay attention to the metrics that matter such as sales, revenue, and newsletter signups, as well as customer engagement such as website visits, CTRs, and time spent browsing your website.
- Look at how to turn vanity metrics into money or the next steps of engagement. What can you offer new followers to engage them? What could you do to convert them to newsletter subscribers, etc.?
- Look at turning successful posts into ads. If you do have a post with a lot of engagement you could leverage the success by turning it into a paid advert with an offer for example.
Ineffective management
Poor management is another top reason for startups to fail. This can be due to needing more experience on both a business and managerial front. In turn, this can lead to poor decision-making and management in finance, purchasing, marketing, selling, recruitment, etc.
How to turn it around
- Management training. Upskilling managers in the areas they’re weak on can help improve managerial issues.
- Outsource work to experienced professionals. Certain jobs such as bookkeeping, payroll, or social media management can be carried out by professional service providers.
- See planning, research, and training as ongoing concerns rather than something you do at the start of your business journey.
- Keep a handle on costs. Things like utilities, your business phone service, insurance, etc., can spiral and affect cash flow management if you’re not monitoring them.
Final Thoughts
Startups do fail. It’s an uncomfortable, often heartbreaking truth. This is why keeping an objective overview of your new business is important. While passion is a crucial element in starting up a new business, ruling your business baby with your heart isn’t generally enough to make it a success.
Spotting and acting upon early warning signs, such as low sales and poor customer engagement, can help you form a plan of action before it’s too late.
