Ten things that kill Startups
Starting a new venture is exciting, engaging, daunting, and challenging. Statistics highlight the precarious nature of this endeavour: more than 60% of Australian businesses close within five years of launching. According to the National Retail Association, in 2023 alone, over 15% of Australian companies ceased operations, marking the highest failure rate since the Global Financial Crisis. However, the inherent risk of failure should not deter ambitious entrepreneurs from pursuing new business opportunities.
At Auscorporate, we have identified recurring challenges faced by startups. What exactly are these issues? Here are our top ten things that kill startups…
From undercapitalisation to shareholder disputes and market misjudgments, understanding these pitfalls is crucial for any entrepreneur looking to pave a successful path
1. Being undercapitalised
We put undercapitalisation first, as the number one reason start-ups fail in our experience is a lack of capital.
Being undercapitalised where the “daily struggle is real” is a hallmark of many startups. Unfortunately, it’s one of the main reasons they fail. Heavily bootstrapped startups struggle to realise opportunities and gain the market traction they need, or worse, they cannot gain traction on their pre-revenue plans because their cash doesn’t support their needs.
When management diverts its attention to cash flow, away from opportunities, it only takes a few debtors to arrive late, and solvency becomes a risk.
No one would pretend that obtaining sufficient capital to operate a startup is easy, and few startups enjoy that freedom. Undertaking financial planning before the startup gets off the ground is the best way to know what’s likely to be required. When the startup is in full flight, having professional advice, particularly on cash flow management, is vital. If you’re running a startup and are unfamiliar with the concept of safe harbour, don’t manage cash flow regularly, or are making commitments to expenses that you’re unsure how you will pay for them, get advice early. It could save your start-up.
2. Having a shareholder disagreement
The honeymoon was great; we sat on the beach and realised that we wanted to head off in two separate directions. Startup founders often have differences of opinion, and those different viewpoints can be critical to the success of a start-up. Not every start-up will have multiple founders, but when numerous equity holders are involved, and the fundamentals of the start-up are not agreed upon, or the process for resolving disputes isn’t clear, it can be a ticking timebomb.
Before incorporating, take the time to create a blueprint for the organisation that addresses strategy, roles, finances and a go-to-market. Obtain professional advice on formulating a shareholders agreement with more than one equity partner and make sure it contains dispute resolution provisions.
From beachside dreams to boardroom realities, divergent visions among start-up founders can spell disaster if not properly managed. Before you incorporate, ensure your startup’s success by crafting a clear blueprint that outlines strategies, roles, finances, and market entry plans.
3. No demand for your product/service
Great ideas often lose their lustre when confronted with market realities. Launching a startup without thorough market research is almost certainly a recipe for financial loss. Assume that competitors already exist, and your product may not be as unique as you think. It’s crucial to carefully consider the demand and how it addresses a genuine need. Startups that overlook the limitations of their market or the challenges in penetrating it might discover that their passion project lacks a viable market.
Conducting market surveys, engaging with potential customers, identifying competitors, and exploring untapped market opportunities are essential. These actions significantly reduce the risk of a startup’s efforts being in vain, ensuring a more informed and strategic approach to market entry.
4. Growing too big, too fast, with an extra dash of ego
Should this be ranked number two on our list of startup pitfalls? Probably. We often observe start-ups that prematurely expand beyond their financial and operational capabilities, inevitably leading to their downfall. For instance, a start-up that successfully manages $1 million in sales might be tempted to accept orders that push revenue to $5 million. However, this aggressive growth is often unsustainable if the underlying capitalisation only supports the original $1 million business. Startups can effectively win enough business to force themselves out of business, not recognising that increased revenue significantly strains their cash flow and capacity to deliver.
Additionally, a common pitfall is the “build it, and they will come” mentality, where start-ups prematurely scale their operations—hiring staff or accumulating inventory—without secured sales to support this growth. This bullish outlook often results in financial stress when the expected sales revenue fails to materialise.
The risks associated with capital are only one concern with scaling; scaling operations sustainably can present a big challenge for startups. The assumption that strategies effective at a smaller scale will work just as well when exponentially increased can be a fatal miscalculation. Ego can often drive these decisions, leading to critical misjudgments about a startup’s capacity for growth. It is crucial for startups to align their scaling strategies with realistic assessments of their operational and financial foundations, adapting carefully to growth to avoid overextension.
5. Being a copycat
Emulation may be the sincerest form of flattery, but it does not always translate into good business. Understanding the existing market players is critical if you intend to capitalise on being a fast follower. However, it’s important to note that many start-ups that merely follow trends often fail.
The propensity for failure is particularly high in the technology services sector, where the model of just another consulting company is common. On the positive side, these organisations perhaps feed opportunities for consolidation, but founders often become disillusioned when they realise that merely copying an existing service delivery model leads to unsustainable price competition. To avoid this pitfall, it is essential to think carefully about what sets your start-up apart.
Embrace and highlight your unique attributes. Think about how to differentiate your offer in the market and consistently remind your target market - and yourself - of your startup’s distinctiveness. This commitment to differentiation is not just about standing out; it’s about making sure your startup remains top of mind, because it is unique.
6. Being unable to raise funds
Public companies can raise funds from capital markets with relative ease. Startups often have to squeeze many rocks to see if a drop of financial life-saving blood comes out. When a startup is operating, the time to raise funds is now. From identifying prospective investors to understanding the fundraising process and, importantly, how long it can take. It’s also vital to consider non-dilutive measures like debt capital, the ‘bank of mum and dad’, and the raft of government incentives on offer that could help a startup get to breakeven or support a sustainable growth plan.
The single most significant factor we see in start-up failure due to fundraising is starting fundraising too late, often because things are going ok, and then they aren’t.
7. Trying to be all things to all people
When your startup is in the early stages, it can be tempting to grow the types of services and products you offer to cater to opportunities that arise. The broader your service or product offering, the more complex your operations must be. While diversification is an excellent strategy to build resilience in a startup, trying to be all things to all people is a high-risk strategy.
Let your startup’s purpose and mission help shape your offer in the market. Stay true to the course, and don’t pivot too far from your offer for easy money.
8. Not having a good grasp of tax and other statutory requirements.
Not paying taxes or employee entitlements is a quick way to end up in hot water. It can also damage your long-term prospects for obtaining commercial credit and may diminish the value of your organisation on a risk basis when trying to sell it. Tax records show if companies pay their taxes late, and more frequently, those records are now used by the government to assess the suitability of suppliers and by banks and other non-bank lenders to assess creditworthiness.
Startups must pay taxes and superannuation, maintain workers’ compensation insurance and meet other statutory obligations like all other businesses. Understanding these obligations is essential and should inform budgets and financial modelling.
Skipping taxes isn’t just risky—it’s a fast track to financial trouble and diminished business credibility. Keeping up with taxes, superannuation, and insurance isn’t just about compliance; it’s about safeguarding your startup’s future creditworthiness and market value
9. Not having enough allies
Don’t attempt the entrepreneurial journey solo. Numerous startups fail because they lack a robust network of supporters who can help promote their business. This includes organisations embarking on similar ventures, suppliers who can cater to startup needs, and industry veterans who have already achieved success.
Are you not keen on networking and running a startup? You’re probably in the wrong business. The more people your startup has in its network, the better. Networking is time-consuming and something that not everyone finds comfortable. Having allies who can help startup founders make the right connections is one way to accelerate the process.
Referrals are an especially powerful tool for growing a startup. Unlike traditional forms of marketing, referrals are backed by trust and personal endorsements. This type of marketing not only spreads awareness of your business but also enhances its credibility. It’s crucial to reciprocate for those who refer you, fostering a mutually beneficial relationship that can lead to further opportunities. Maintaining a cycle of giving and receiving referrals can create a supportive business ecosystem where trust and collaboration pave the way to collective success.
10. Not having the right people.
As startups evolve and grow, they face the critical challenge of diversifying their teams with individuals who bring varied skills and experiences. Human capital is essential for startups to scale effectively and efficiently. Having the right people at the right time can greatly enhance a startup’s ability to navigate the complexities of expanding markets, evolving customer demands, and increasingly intricate operations.
However, a common pitfall for many growing startups is the mismanagement of human resources. Those looking to expand or prepare for an exit often struggle to assemble the right team because they overlook the value of individuals with corporate experience. Ironically, the experience these professionals bring is often crucial for navigating the transition during an exit.
Another frequent mistake is the assumption that scaling necessitates a large increase in staff, leading to rapid workforce expansion. This approach can quickly become financially unsustainable, resulting in a bloated payroll that drains resources and may lead to failure.
On the other hand, some startups rely too heavily on their original team members, who, despite being capable of managing early-stage growth, may lack the necessary skills and experience for later stages. That dependence can hold back a startup’s development and prevent it from achieving its full potential. Startups need to strike a balance between leveraging fresh perspectives with the insights of existing employees.
Need help?
Need help or advice to resolve challenges in your startup? Contact us for help.