According to the Bureau of Labor Statistics, roughly 20% of small businesses fail within their first year. This can actually be quite an encouraging statistic though—after all, it means that the majority of businesses make it past that tough first year.
But as time goes on, the chances for long-term, sustained success seem to get slimmer and slimmer. By year five, only about 50% of companies are still in business. And by the tenth year, 70% will have closed the doors for one reason or another. While some industries are more failure-prone than others, there’s no denying that the business practices of the company founders will usually be what makes or breaks a startup.
With that in mind, I recently spoke with a few experienced entrepreneurs to gather their insights into how business owners, potential investors and even employees can better recognize when a company needs help.
1. Making The Wrong Hires
According to Andrea Fryrear, agile marketing coach and cofounder of AgileSherpas, leaders must be willing to hire people who are smarter than themselves if they wish to achieve long-term success.
“The first few hires say a lot about whether a company is going to be around for the long haul. If a company hires amazing people who could be running it in a few years, they’re setting themselves up for a bright future. If, on the other hand, they bring on barely qualified people who’ll blindly do the leaders’ bidding, things aren’t going in a good direction. Take a look at employees one through five, and you’ll get a solid predictor of how the company will perform.”
Considering Fryrear’s words, it shouldn’t come as much of a surprise that Harvard Business Review reports that “chief executives view the unavailability of talent and skills as the biggest threat to their business.” Testing basic skills, evaluating emotional intelligence and looking for standout past performance are all a good start. But companies also need to hire innovative thinkers who are passionate about the product or service they’ll be working with, if they want to succeed.
2. Lack Of A Solid Marketing Plan
If you don’t have a clear picture of exactly who your (soon to be) customers are, and a smart approach for getting in front of those people in a scalable fashion, then you’ll likely struggle to create a sustainable business.
“As I discuss business ideas with prospective entrepreneurs, I often find that they severely underestimate the amount of work and resources that they need to plan for when it comes to marketing and outreach. They are understandably excited about their business idea and concept, but that can lead to the dangerous assumption that everyone else will be too,” says Greg Bray, president of digital marketing firm Blue Tangerine.
“We live in a very noisy world, and it takes effort to get your message noticed. A business that doesn’t have a plan to get their product or service in front of their target audience will never get off the ground. This doesn’t mean that you need a million dollar marketing budget, but a ‘build it and they will come’ mindset rarely achieves the desired goal.”
All businesses must launch with a clearly defined target audience in mind. Learning as much as possible about your customers should then guide the entire marketing campaign—including messaging style, which social media platforms you’ll use, if you’ll be leveraging blogger outreach and even how you design your website.
Without a marketing plan in place, how can you expect to make any sales?
3. Ineffective Team Management
Lee Harrison, founder and principal of structural engineering firm Axiom, PLLC, notes that many startup founders are simply unequipped for thriving in a leadership position.
“The founder often lacks management of people skills, having spent their previous work life developing the skill or product knowledge that led them to launch their new business.”
Harrison continues, “Building teams is a big challenge, and while people will initially be excited about the potential of the company’s future, they’ll quickly settle into wondering who’s leading them and whether this person will get them to where they want to be in their career journey.”
A great product idea on its own doesn’t lead to a successful business. Founders must understand how to create a viable business plan and provide strong leadership to their employees. This could be why mentored startups consistently raise up to seven times as much money as non-mentored startups—they have someone helping them navigate the business side of things.
Founders must take the time to strengthen their own weaknesses, particularly in terms of building and leading a team of employees. Otherwise, the company can quickly lose direction and momentum.
4. Poor Communication From The Top
A lack of clear communication from the leaders in an organization is a clear sign of trouble on the horizon. When a CEO refuses to be present or transparent during a public crisis (such as the recent challenges for the aircraft manufacturer Boeing), it’s a sign the company is in trouble—or soon will be.
This same problem can creep up internally within a company too, especially if management stops communicating openly with employees. This can sometimes be explained away by communication styles, laziness or a full schedule, but often it can seem to employees that management doesn’t want to share how bad things are, or that they don’t want to lie to employees about it—so they’re intentionally saying nothing.
Transparency in the workplace ensures that everyone is on the same page. It builds trust and keeps lines of communications open between employers and employees, which makes it easier to address problems while helping everyone feel valued. Dishonesty not only creates a negative work culture, but it can also ruin your relationship with customers once the truth comes out.
While these certainly aren’t the only issues that can reveal when a business is headed down the wrong path, they do serve as key warning signs to keep a close eye on.
If you’re noticing these problems starting to bubble to the surface in your own business, it’s your responsibility to take action now in order to course correct.
Wait too long, and your big idea will be just another failed startup statistic.