Entrepreneurship is a tricky thing and unless, entrepreneurs are on top of the game all the time, the chances for failure are very high. Research has shown that not more than 10% of all new ventures go past the second year of their existence and that entrepreneurs often end up on the wrong side of success. This article examines and discusses the top five reasons why entrepreneurs fail and these relate to funding, staffing, financials, operational reasons, and peaking too early or too late. All these reasons have the common theme of not managing the venture successfully and being lax or lazy as far as the nuts and bolts of managing the venture is concerned.
Further, the other theme that runs through these reasons is missing the trees for the forest or not paying enough attention to details and at the same time, missing the forest for the trees or getting too bogged down in the details that the big picture is ignored.
Problems with Funding
The first of these reasons relates to the funding aspect. As we all know, new ventures and startups need funding at all stages of their lifecycle and hence, the entrepreneur has to ensure that the venture capitalists and the financial institutions back him or her from the word go and continue their assistance throughout the process.
Often, it is the case that entrepreneurs fail to deceive as the idea which looks good initially fails to generate revenue or business leading to the venture capitalists developing cold feet and backing out from the venture. Apart from this, it is also the case that some startups and their founders do not anticipate the continuous cash flow that is needed to keep the venture afloat and we shall be discussing this in detail separately.
The second reason why entrepreneurs fail is related to staffing wherein the entrepreneurs often do not staff their ventures with the right resources and often fail to have the required resources when the venture takes off. For instance, in these days, it is the case that the ventures need enough resources when the projects roll in or when business picks up. On the other hand, having too many resources is also a drag on the venture as resources cost money and time to maintain. Further, not having the right resources because either they are too expensive or they do not want to take the chance of working for a startup. Indeed, gone are the heady days of the dotcom boom when just everyone and everybody wanted to work for a startup. Nowadays, many employees do not want to risk their futures by joining a startup whose future is uncertain.
Cash Crunch and Drying up of Liquidity
The third reason why new ventures fail is related to the financials or the managing of the cash flows which have been mentioned earlier. This aspect has to do with the fact that most entrepreneurs fail to anticipate the cash crunch which arises from the imbalance between accounts payable and the accounts receivables.
Further, it is often the case that new ventures budget for revenues in the future now and this means that unless the revenues materialize, the venture would run out of cash. Moreover, it is also the case that the funding from the venture capitalists might dry up suddenly leading to liquidity problems. Indeed, though the venture might postpone receivables to the future, it cannot do the same with the payables wherein suppliers, staff, and vendors cannot be assured that the entrepreneur would honor the commitments as can be seen in the way the Aviation sector in India has seen some high profile closures in recent years.
The fourth reason why new ventures fail is the operational aspect wherein the entrepreneur fails to manage the nuts and bolts of running the business in an effective, efficient, and efficacious manner. For instance, many entrepreneurs often do not involve themselves in the ground realities of running the business and leave this to others wherein they concentrate on the bigger picture. Though we are not advocating that all entrepreneurs should micromanage their businesses, some amount of involvement with the day to day running is essential and indeed, critical. This means that the entrepreneur should handhold the business especially in the formative years or the first year at the minimum to ensure that there is no slip between the cup and the lip where the translation of ideas into the running of the business is concerned. Often, many entrepreneurs consider it beneath themselves to engage and involve in say things such as work schedules, human resources, and day to day financials and end up paying the price for such negligence.
Peaking too Early or Too Late
The fifth reason why many entrepreneurs fail is that their ventures often peak early or peak late leading to missing the curve when the right combination of ideation, incubation, and execution is actualized leading to success. For instance, some entrepreneurs have great and game changing ideas but peak too early meaning that they misread the signals from the market. This often leads to burnout and fatigue especially when the desired momentum has to be generated. On the other hand, some entrepreneurs peak too late meaning that they misjudge the timing when their products or the solutions have to be brought to the market. In both cases, the imperative is to ensure that the time from ideation to bringing to the market is just about right.
Though we have listed the top five reasons for failures of new ventures, there are other reasons as well including differences between the promoters as well as other personality clashes and issues.