Why businesses fail: Common startup risks and how to avoid them

Starting up

18 May 2020

There's no way around it: starting your own business means taking a risk. For many, it’s a leap into the unknown, with only your instinct and determination to guide you and make it work.

The rewards can be great, but in many cases the drawbacks are real too: 60% of new businesses fail in the first three years.

But the world of startups isn't about taking reckless gambles. The difference between the companies that survive uncertain periods and the ones that don't is careful planning.

AXA’s guide explains more about the common uncertainties facing startups – and how to survive them.

Funding the company

The risk

When you’re just starting out, you usually need money behind you to develop your product or service before you can start trading. Startups often spend more than they earn for as long as two or three years. Securing funding from investors and loans can be unpredictable in itself, and you need to pay back the debt eventually. It’s likely that you’ll also need to throw some of your own personal savings into the pot, too.

The solution

Having a clear financial forecast and a working budget will help to mitigate the uncertainty. Cash flow can be the big challenge for new companies: try taking the advice of Ben Rubenstein at marketing startup Yodle, who negotiated flexible payment terms with suppliers to make those early days less unpredictable. And remember, government grants are available to top up your investment, so don’t be shy in applying.

 

Dealing with competition

The risk

If you've had a great idea, chances are someone else has had it too. A crowded marketplace, dominated by big companies, will be hard to break into. Meanwhile a non-existent marketplace could also be a red flag – there might be a good reason why nobody has pursued your idea. But in any case, dealing with the competition, whether it be a large corporation or a small local company, can be tricky to navigate.

The solution

Wherever possible, patent the unique selling point of your product or service so your competitors can't borrow it. Keep your ideas secret until you're ready to launch onto the market. And by the time your competitors respond, you'll already be creating a new and improved version. This kind of secrecy, where even employees don't know about new products, is how companies like Apple stay ahead of the pack.

You can also ensure your business has a competitive edge by having a solid pricing strategy. Find out how to successfully price a produce here.

 

Shifts in demand

The risk

Your new business might not take off in the way that you'd hoped. Technology can change and render your product or service obsolete, or a giant company might take your idea and add their own spin. Perhaps you’ve overestimated the demand entirely and you’re not getting the number of customers you expected.  

The solution

Future-proof your business and be prepared to pivot and adapt. A business plan can look good on paper but it doesn’t mean it’ll work in the real world. Just look at the the founders of Twitter who were originally working on a podcast platform. But when Apple announced that iTunes would have built-in support for podcasts, they changed their plan, knowing they couldn't compete with an industry giant. By adapting their idea into a social network built around fast, fun status updates – they created a $19 billion company.

 

Coping with accidents

The risk

Your business plan might seem rock solid, but accidents happen. Events out of your control, like the coronavirus pandemic or unexpected extreme weather, can leave you out of work for long periods of time. Nasty surprises can be expensive, especially for businesses in those tricky early days.

The solution

It’s important to have a tried-and-tested business continuity plan ready and waiting should the worst happen. Whether it’s a heavy snowstorm or a sudden broadband outage, business continuity is about keeping your business up and running when things go wrong. Find out how to write a plan here.

 

You can also make sure your business is protected from unexpected shocks with business insurance. When you've got the coverage you need, you can focus on success.

 

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