7 Reasons Why Companies Fail

reasons why companies fail

According to ONS statistics, the business death rate between 2019 and 2020 hit 10.5%, with London reaching the highest business death rate of 12.1%. 

Why is this important? The key to survival and being one of the minority of businesses to reach a series B funding round is failure. Learn from other business’s common, but nonetheless fatal failures, to help inform what not to do during the first 3 years of your business journey.

7 reasons why companies fail are:

  1. Legal challenges
  2. No market need
  3. Flawed business model
  4. Hiring the wrong people
  5. Founder fall out
  6. Pivot gone wrong
  7. Product mistimed

1. Legal Challenges 

As simple as your startup might seem, you can still face legal complexities that can cause your business to fail. 

legal challenges causing companies to fail
Remember having legal challenges is not always a bad thing, overcoming those challenges now can often cause less damage than if they were to present themselves years down the line.

Common legal challenges include: 

To avoid this, make sure you have a clear deal with your co-founders; that you have a name that is available to use; that you comply with laws and regulations around tax and stocks; that you have the appropriate permits and licences; that you keep hold of important corporate and HR documentation, and that you have protected all intellectual property you have developed, e.g. patents and trademarks.

External Influences

It’s also important that you keep across external legal and regulatory changes. For example, in 2020 the US government imposed 10% tariffs on products imported from China. This incited a trade war which ended in the tariff increasing to 25%.

Similarly in the UK, the trade implications of Brexit are continuing to impact exports within and outside the EU. If your target market lies outside of the UK, it’s therefore essential that you research and keep on top of trade barriers and tariffs before drawing your marketing plan.

2. No Market Need

For your business to thrive, you often have to find an unmet need within a market and then fill it, rather than push your product or service into an already competitive space. 

According to CB Insights, tackling problems that are interesting to solve rather than those that serve a market need was cited as the No. 2 reason for failure, covering 35% of the business failures that they studied.

Also Consider Market Changes

Granted, external market changes can take hold with little warning leading to a radical reduction or complete depletion of market demand for your service or product. Forcing your business into failure.

Take the case of Brideside, an exciting new startup looking to upgrade the experience of wedding shopping and planning. The business failed due to “two thirds of weddings being cancelled in 2020 and uncertainty ahead”. Unfortunate timing indeed, however had the founders pivoted and changed target market, the business may have continued into its third and fourth year.

Much like Brideside could have pivoted to an online events market, or online purchasing experience, it’s worth preparing a contingency plan in which other potential markets are identified now before it’s too late.

3. Flawed Business Model

Your business is more likely to fail, and investors will be more hesitant to invest, if your business model is flawed at its core. The most obvious flaw in a business model is value propositions that generate more costs than revenue from customers. 

Other flaws might include being unable to reach or deliver value to your customers, or failing to establish relationships altogether — relationships that allow you to retain and grow your customer base are fundamental to your success. 

Your Business Model Should Attract investors

When it comes to seed funding and series A, the ideal scenario is to have potential angel investors hear about you before you hear about them. This can change the nature of the conversation entirely. If your business model is truly unique and fits a market need, then this will become more likely.

getting found by investors so companies don't fail
From newspapers to LinkedIn feeds, investors will be actively looking for unique business models to invest in.

When attracting investors for a series A round, you will find investors are more likely to invest in ‘a dream with a little bit of proof’ according to a Globacap report. However, offering evidence of real traction in revenue and demonstrating that the business model is scalable is essential for reaching a series B round.

When investment rounds form an essential element in your businesses survival, avoiding a flawed business model and demonstrating traction could be exactly what you need to survive. 

4. Hiring the wrong people

When it comes to hiring, a diverse team with different skill sets is essential for your success. Unbalanced or incompatible competencies, or individuals who lack essential skills, will hold your business back. Attracting this level of talent can be difficult, but it’s far from impossible.

As famed advertising tycoon David Ogilvy once famously said: “Hire people who are better than you are, then leave them to get on with it.”

Ultimately, attracting talent outside of your skillset involves two key challenges: finding team members you can trust as well as offering incentives and benefits that higher-paying corporations cannot offer.

Finding Team Members You Can Trust 

This can be most effectively identified at the interview stage, where you simply follow three steps:

  1. Monitor body language and facial expressions – can they maintain eye contact? Do they fidget or touch their face?
  2. Contact their references – and ensure the claims and statements they have made are correct.
  3. Ask questions about honesty – for example, “what does integrity mean to you in the workplace?”

Offering Incentives and Benefits

The most common incentive to attract talent to a startup is equity, most commonly offered through an EMI (enterprise management incentive) scheme. Once set up, an EMI scheme is easy to use and offers unique tax benefits to the employee.

Ultimately, by offering a share in your business, you’re offering them an opportunity to win big over the long-term and gain more on their time-investment outside of a salary.

5. Founder Fall Out 

As the founders, you are responsible for the business’s leadership and how your employees and clients perceive you. Communicate often between founders and communicate well, and create opportunities for the team to offer feedback on your leadership. If you don’t, and you fail as a leader, the business will fail too. 

“Everything rises and falls on leadership.” John Maxwell Team, The New York Times (2016).

Fifty-seven percent of employees quit their jobs because of poor leadership, so make sure to develop the skills and bond with your co founder to be a good one. 

collaborating with co founder to avoid company failure
Start by assigning roles and understanding who is responsible for what.

You should also keep in mind that an angel or venture capital investor will almost always investigate the character founders (and their team) before making a series A investment.

6. Pivot Gone Wrong

“All failure is failure to adapt, all success is successful adaptation.” Max McKeown, Adaptability: The Art of Winning in an Age of Uncertainty (2012).

This was exactly the case for ‘Burbn’ now known as Instagram and ‘ThePoint’ now known as Groupon. 

It’s important you identify a legitimate pull or push factor before pivoting; is there an external market change or industry change pushing you out of the market, or is there a consumer-behaviour trend or market opportunity pulling you into a different market?

Failure to adapt when the market changes can be fatal for your business. Research and forecast your market, and your position within it, to ensure you are up to speed — if not ahead of — the latest trends. 

7. Product Mistimed

Releasing your product too late often means you have missed your window of opportunity in the market, the product is already in the growth stage and has a handful of major players.

Releasing your product too early is more common than you might think and may lead to users writing it off as ‘not good enough’ or simply ‘not meeting their needs’.

The .com revolution was a classic case of many businesses releasing too early: 

“There were more online stores in 2001 than there were people who’d ever used a credit card online. It’s not that people were wrong, just much too early” – Guy Raz, How I Built This (2020)

Market research and user testing will ultimately allow you to identify how well timed your product will be going to market. More importantly, if you can prove how well timed your product is, and how large that market opportunity is becoming, landing that series A will be far more achievable.


 

At Velocity Capital, we invest in digital-first direct to consumer companies with unstoppable founders. Does this sound like you? Get in contact with us to find out how we can provide early stage capital funding to your business, and view our current investments to see who we’ve worked with so far.

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