In the present Nigerian Economy, having a 9 – 5 is not enough to sustain an average Nigerian family. Hence, the need to diversify and have other sources of income. In the bid of doing this, many Nigerians get into the business world and become entrepreneurs.
Businesses start in different fields intending to contribute to the economic development of the country. However, the majority of these businesses do not make it to the light of day. So you may be wondering, why do startups fail exactly?
This article will be looking at some of these reasons why startups fail in a bit. The majority of these new businesses are commonly known as startups or Small and Medium Enterprises (SME’s). They encounter various challenges and after speaking to a few entrepreneurs, I managed to gather some intel.
Table of Contents
What is a Startup?
A startup is any business that has identified a problem and seeks to provide a solution to the problem. Any business in its first stage of development or within its first to the eighth year of existence can be considered a start-up. Startups are usually characterized by the small numbers of employees, market reach, amount of capital investment, limited resources and high uncertainty. Hence, that POS business on your street as well as the emerging Fintech expert can be considered a start-up.
It would interest you to know that startups contribute almost 50% of the GDP of the Nigerian economy. In contrast, according to a 2020 Businessday report, the startup failure rate in Nigeria stood at 61%. In essence, only 39% of startups in Nigeria survive. Who do we blame for the high rate of startups failure?
As much as we’re quick to point at the unfavourable economic condition of the country, entrepreneurs also contribute a great deal to the reasons why startups fail. There are certain things startups should avoid doing to ensure continuity and excellence.
In this article, we’ll be looking at the top 8 reasons why startups fail.
8 Reasons Why Startups Fail
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Improper planning
The first reason is the lack of a business plan. The popular saying “when you fail to plan, then you are planning to fail” readily comes to mind. A start-up without a proper business plan is planning its failure before it even starts at all.
Many business owners do not properly research the product or service they intend to bring into the market. They start up on impulse and fail at the earliest stage of development. Most Nigerian businesses start as being a gamble, then follow the tides and see how long the product would last. Meanwhile, starting a business requires much more than just a flair for doing business. Lack of in-depth research is top on the list of reasons why startups fail.
Therefore, the first thing to do when starting a business is proper planning. Here you do thorough research of the business you want to start. Examine your target audience and the market. Identify an angle for market penetration, and have a directional business plan.
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Lack of a mentor
Another major reason why startups fail is that they lack mentors. To be successful in any field or business, you must have someone who’ll shadow your actions. Someone who can direct and guide you on the way to go. There’s nothing new under the sun which means that your start-up idea has already been explored by someone. It is therefore necessary that you recognize a similar and successful business or entrepreneur who will benefit you.
Understudy their activities and mode of operation. What did they do right that you can imbibe and where did they misfire that you should avoid? Get the owner to mentor you, directly or from afar. That way, you are sure to not make the same mistakes they made. Be teachable and allow yourself to be tutored by them.
It is commonly said that a child that climbs on the shoulder of an adult can see far. However, you cannot see farther than the adult. Hence, there’s the need to get a shoulder you can climb on when it comes to business as well.
The reverse is the case with startups, especially young entrepreneurs. We want to delve into the business and begin to make the best of profits immediately. Unfortunately, the unwritten law of success does not permit laxity.
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Running out of cash
The inability to raise new capital is another major factor that contributes to the failure of startups. Running out of cash is a sad reality for many businesses. When there’s no planning and proper management of finances, the cost of production becomes more than the income leading to loss of profit. In the long run, the business begins to experience downtime and is unable to pay workers and sustain the continuous production of the product they provide.
Businesses that are funded through loans or external investors are at a higher risk. Getting loans and investors to reinvest in an already failing business idea is usually tasking – almost impossible. Investors want to see the credibility and tangibility of the product. A convincing business proposal can play the trick. However, many new businesses do not have such fool-proof proposals.
Also, mixing business capital with personal income and expenses may lead to the misappropriation of funds. It is therefore advised that one runs a separate business account for accountability and easy tracking.
Offering credit to customers based on sentiments, especially in Nigeria where friends and family will guilt-trip you at the slightest opportunity, can also lead to a business running out of cash. Once a business runs out of money, then it runs out of time and eventually, it’s out of the market. Having financial issues will always be one of the notable reasons why startups fail.
Read also: Things to know before and while pitching to investors
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Lack of market for your product
Startups also tend to fail when there’s is no market for the product they provide. As innovative as a new product launch can be if there’s no market for it, it is doomed to fail. Your business must be centred on meeting a particular need. Identify a need and seek to provide the perfect solution to that need.
Instead of starting a business to fulfil the demands of the market, many Nigerian entrepreneurs start with the aim of making money. This reason is very justified considering the economic condition of the country. However, starting a business for immediate profitability is a death trap for that business idea.
The intended customer base of any business should be large enough to guarantee its survival. A business with small market size or no market at all will lead to no demand. As long as there’s no demand, then there will be no supply, and eventually, the startup will fail.
Are you nursing a startup idea? Join our whatsapp community and you may have an opportunity to validate some of the problems you’re trying to solve.
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Cost
Cost and pricing is another one of the reasons why startups fail. With the price of goods and services skyrocketing daily, no product comes cheap any longer. For a business to thrive in the current economy it has to find a balance between being outrightly expensive yet affordable to its market.
On the other hand, setting a fixed price for your goods or services can pose a great challenge. There are determining factors to consider when setting the price of your product or service. The quality of your product goes a long way to determine the price as well as the sale. A low-quality product set at an expensive price would likely have low patronage compared with a high-quality product at the same price.
Who is your target audience? Don’t market a product that is beyond the purchasing power of your target audience. If you do this, you don’t need a soothsayer to predict the failure of such a startup.
Always consider quality, cost of production, and target consumers before setting the price of your target audience. All this should be done at the research phase before the business starts.
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Competition
Like in every market, competition is inevitable. There will always be bigger, moderate, and smaller companies that provide the same product as you do. Staying afloat on consumers’ minds and being their best choice depends on how much you invest in marketing, advertising and selling your products.
Many businesses which started as the best are now behind because they try to market an average product alongside similar existing products with years of existence and trust in the market. For instance, introducing a new brand of phone in a market that is dominated by Samsung, Apple and Infinix without any feature that stands out. It takes a meticulously engineered product to compete in such a market.
Every entrepreneur should avoid starting a business in a highly competitive market without any form of uniqueness . Chances of success become slim when competitors outnumber a product. Such a product would in no time become irrelevant to consumers since there are many other available options. Hence, business becomes the survival of the fittest or rather survival of the most strategized product.
Read also: Digital marketing platforms for entrepreneurs in Nigeria
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Expanding too quickly and spontaneously
Many times, entrepreneurs equate the success of their business to the level of expansion. Then, they begin to expand without proper planning. Business expansion is and should be gradual. Before you expand your business in terms of production rate or product range or any aspect whatsoever, take into cognizance the degree of market demand.
When the demand for a product is higher than the supply, then that’s a good justification to take steps towards expanding. For an effective expansion to take place, there should be an increase in the management, production, marketing and supply team.
It is expedient that you focus on a business growth that is slow and steady. Establish a strong customer base and a good cash flow. Rushed expansion and unrealistic measurement of success will always contribute to the reasons why startups fail.
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Poor management
Lastly, poor management by the entrepreneurs and their team also contribute to startup failure. Many business owners don’t have formal management training or education which increases the risk of failure. Continuous learning should be the prerogative of entrepreneurs. Understanding how to manage both material and human resources will go a long way to prevent startup failure.
When the managerial team lacks a proper sense of decision making , a business will always face decisions that will deter its growth. Every member of the board must be available when making major decisions for the business. This will prevent unnecessary disagreements and unstable policy changes which would inadvertently cause the business to fail.
Human relations is also an important aspect founders often overlook. The interest of your employees should be the topmost priority. No matter how great your business idea is, without a highly engaged and motivated staff, the startup will always be close to its last breath.
Read also: How to become a successful entrepreneur in Nigeria
How to Avoid Failure at the Early Stage for Startups
One key subject that keeps reoccurring is the need for thorough research. Conduct a proper investigation before you start that business. Ensure that that business idea has a favourable and accessible target audience.
Be cost-effective and level-headed in everything you do. When you set prices for your products, do not be biased. Do not mix business with sentiment. Study your competitors so they don’t run you out of business. Be at the top of your game. Having a good quality product, identifying your unique selling point and proper marketing strategies helps stay afloat with competitors.
Also, employ people who are as passionate as you are to grow your business. Constantly, encourage your employees with words and incentives; it will help them do better. Enrol in courses that will equip you better in the sector of business you want to start. Don’t start a business on an impulse.
No start-up can develop if they don’t know what to do when they experience an impediment in their path, which is why it is best to have this information at hand before you start that business. Every entrepreneur’s dream is to keep doing business. Avoid these things as a start-up and you’re well on your way to successful business growth and expansion.
See you at Silicon Valley. Ire ooo
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About the Author
Omolara Ogundipe is a teacher, writer and ultimately a student of the world. She’s on a mission of educating and improving people through her writings.
About Author
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3 comments
This is very informative.
I run a farm which I started in 2014.
We have grown to a big farm.
We are into consulting and providing management advisory services for smaller farms. I have seen a lot of farms die in the first few years and the points listed here are usually major contributing factors to the collapse of most farms.
One of the main reasons why we setup the Bisiness Advisory Service which is the arm of our business that is responsible for our consulting business is to help startup farms navigate through the challenges associated with most startups as mentioned in this article.
So, I totally agree with the points shared in this article as leading causes of startup failures.
Thank you for reading and contributing your thoughts to the piece, Benson. It really takes a lot of strategic planning and decision making for a startup to thrive.
Thank you for reading and contributing your thoughts to the piece, Benson. It really takes a lot of strategic planning and decision making for a startup to thrive.