The hardest part of a startup creation is getting through the first year of its existence. According to statistics, almost every project “does not survive” and is closed for certain reasons in the first 12 months after its opening. There are many reasons for this phenomenon. Most of the businesses die due to the inability of entrepreneurs to correctly calculate and conduct the financial activities of the company. In addition, the closure of a business may be due to the fact that the founders of the companies cannot find investors or they have problems with HR-related matters.
We analyzed successful projects that managed to cope with difficulties in the early years of their existence and stay afloat for a long time. What prevents other startups from being successful in the market? Why do some entrepreneurs manage to make their business sustainable, while others do not? In this article, we will consider the main reasons for the fall of startups in the first 12 months.
1. Lack of understanding if there is a demand for a product
Not all the startup founders have the ability to pinpoint what product or service a customer needs. Most of the time, they make the wrong assumption releasing a product that generates temporary interest or none at all. Most often these are goods that for a certain period become popular among buyers, and then sharply fall in demand. Such “hype” products include spinners, which the whole world was especially keen on in 2017. Literally a few months after the peak of demand on the Russian market, spinners became newcomers from the past for us.
The decision to build your business on a one-time trend product is not a good idea. It is suitable only for those who are ready to track trends in different markets every season and look for a product that is in great demand at a particular moment. You need to understand that using such a business model, it will be difficult to provide the company with stable profits and further development.
2. Irrational spending in the first months
It is generally accepted that a business is successful if it is able to pay off in the first six months or a year of its existence. Every month it becomes more and more difficult to find funds for the development of a startup if the investments run out and the startup does not reach the payback point.
Entrepreneurs launching their first start-ups need to get as serious as possible when it comes to fuds allocation and cost accounting. If you want your project to exist on a long-term basis and really make a profit, then you shall think about where your funds go and whether these expenses help the development of the company.
It is often the fact that company leaders do not have the required knowledge in the basics of business management and financial planning that leads to the fact that the business cannot survive in the market and outperform competitors. Even if the idea of the project is unique and in demand, a startup will not live long without the required funding and competent accounting of expenses and income.
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Often, inexperienced entrepreneurs are chasing a goal to quickly implement their project. They do not consider it necessary to pay attention to analyzing competitors and formulating a project’s unique sales proposition.
In order for a business to remain successful, it is required to regularly conduct market analysis and monitor the development of competitors, to keep up with them. It is also important to constantly create new advantages of your product in order to qualitatively differentiate yourself from competitors.
4. Wrong team selection
We can say with full confidence that poor recruiting for a startup most often leads to its failure. A strong and close-knit team of specialists has a direct impact on the development and success of the project.
It is important to get serious about hiring employees. Many entrepreneurs prefer not to waste time and energy on this. For high-quality recruitment, seek help from outsourced HR services. Do not neglect the services of professionals if you do not have enough knowledge in a specific area.
5. Wrong pricing
The formation of prices for a product or service depends on the cost of the product, the amount of taxes, the cost of the product delivery or service provision. Remember that it includes an intermediary surcharge if you engage a distributor.
In the decision-making process, it is worth calculating the unit economy and determining the profitability of the business model by assessing the profitability of a unit of goods or one customer. It is required to adequately define the value of the product, its uniqueness in the market and the demand for it. By taking all this data into account, startup executives can avoid pricing errors.
5 most influential startups of the decade that changed the world:
Facebook – In 2012, the largest social network surpassed the 1 billion user threshold. The company went public in the same year. Currently, 2.45 billion people use Facebook a month. Over the past few years, Zuckerberg's project has repeatedly shown how important privacy is and what it means in the modern world. According to Cambridge Analytica, 540 million Facebook users were unprotected in 2018. The company also found that hackers had stolen personal information from another 30 million people.
Instagram – With an army of big bloggers and influencers, endless scrolling of feeds, and a flourishing mobile attention economy, Instagram is in many aspects the most important app of the 2010s. Kevin Systrom and Mike Krieger founded the company in 2010. Two years later, Facebook bought it for $ 1 billion. The deal remains the world's largest acquisition of a social network.
SpaceX and Tesla – Elon Musk's innovative start-ups have completely changed the way their industries develop. In 2010, SpaceX became the first privately held company to successfully launch and orbit a spacecraft. Today, SpaceX is worth more than $ 33 billion, and the company itself cooperates with NASA. Tesla became the world's best-selling electric vehicle in 2018. After that, many companies decided to release cars similar in functionality to Tesla. At the same time, the Musk's startup has not yet had a single profitable financial year.
WeWork – With an estimate of $ 47 billion and 12,500 employees in over 800 offices around the world, WeWork continued to develop rapidly in 2019 until it failed globally.
Epic Games – Founded in 1991, in 2017 PC game company Epic Games released Fortnite that became new hit and cultural phenomenon. There are over 250 million Fortnite players worldwide.
Impetus:
Within the first year of a startup, founders inevitably face a myriad of challenges in all areas of the business. The most important thing is not to despair and continue to work, correct all the mistakes you have made and try not to make new ones.
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