Business Strategy

5 Reasons Startups Fail and How You Can Be Successful Instead

successful startup

Want to start a company? You’re not alone. More than 450,000 businesses are started each month in the U.S. according to research from the Kauffman Foundation but about half of them will fail in their first five years.

So how do you build a company that will last?

For those founders who are lucky enough to successfully grow their companies beyond the startup phase longevity becomes a critical objective. Thinking beyond their own tenure, these founders keep their focus on both fundamentals—like practicing financial discipline and assembling a solid management team—as well as a long-term vision for the company. To create companies that will last founders need to focus on five key areas:

  1. Building processes.

The establishment of business process is critical to emerging from startup chaos into a more mature and stable company.  It may seem like tedious work, especially if you have competent people doing their jobs right. But it protects your business from unexpected circumstances, like a key team member leaving or sales volume quadrupling overnight. Having formalized and institutionalized processes means tasks aren’t necessarily dependent on any one person and that things can be scaled up or down without a business stoppage.

  1. Building a strong management team.

In the early days of a startup it’s natural for founders to try and do as much as they can on their own. But as a company grows it becomes almost impossible for one or two people to oversee everything—operations, sales, accounting, fulfillment, marketing—and still work on expanding the business. That’s why a management team is so crucial. If you think you can “do it all” and delay building a management team, your business will ultimately suffer from slower growth.

Timing, however, is critical. When you are working from your living room in pre-revenue phase, the last thing you need is a CFO, COO, and CMO. If your revenues aren’t robust, trying to bring on a full management team could bankrupt your company. Make sure the time is right to bring a management team on board.

  1. Promote people from within while cultivating a strong company culture. 

One challenge that many entrepreneurs face is hiring—either they can’t find enough qualified people or they aren’t sure whom to hire, whether that’s experienced people or young enthusiastic workers, family, friends or referrals. A smart solution is to internally develop talent and promote from within.   This allows you to hire less experienced and less expensive employees and develop them for the business, which makes them more valuable to you and more loyal to the company.

  1. Focus on client satisfaction.

Paul Graham, the founder of the well-known Silicon Valley accelerator Y Combinator, has said one thing a startup needs to do to be successful is delight customers. Founders often don’t focus on individual customers because they worry that such an approach can’t be scaled. Graham writes, “When founders of larval startups worry about this, I point out that in their current state they have nothing to lose. Maybe if they go out of their way to make existing users super happy, they’ll one day have too many to do so much for. I have never once seen a startup lured down a blind alley by trying too hard to make their initial users happy.”

A simple, effective way to measure client satisfaction is with a Net Promoter Score, which is calculated using the answer to one question, on a scale of 0-10: How likely is it that you would recommend [brand] to a friend or colleague?  From that question Net Promoter calculates which customers are your loyal enthusiasts or promoters, those that are satisfied but unenthusiastic and those that are unhappy customers or detractors, who can damage your brand and impede your growth.  Your company’s score is found by subtracting the percentage of detractors from that of promoters.

  1. Profitability.

Last but certainly not least, financial discipline, for obvious reasons, is a critical ingredient of lasting success for any company. Even if you have world-class engineering and design talent, without effective financial controls and expense management you won’t succeed. Make sure every employee at your company understands the financial side of the business and that managers at every level understand how to maximize profits and cut losses.

About the Author

Elena Bajic is the founder and CEO of Ivy Exec, a selective online career network for top performers.