Opening your own business may be a universally shared dream job, but it’s likely one of the most challenging endeavors you can take on.
Being your own boss and running your own business is one of the most common American dreams. It’s a standard trope in movies, where the forlorn lead longingly looks at an empty storefront and dreams of opening their own bakery, restaurant, beauty parlor; by the film’s end, their dream has come true. Three of every five Americans want to start their own business.
Despite the pandemic, the IRS received 4.4 million applications for new businesses, according to the Bureau of Labor Statistics (BLS),and this is while 30% of small businesses were shuttering due to the impact of COVID-19.
New research from the management company Wilbur Labs may demonstrate that entrepreneurs have enough tenacity to set aside the cold, hard facts of how difficult it is to start a business. The BLS released data that showed 20% of all startups fail within the first year. Companies lucky enough to begin with the investment of venture banking have fared poorly: Research from Harvard University showed a staggering 75% (three of four) shutter.
“The failure percentage is certainly high, but starting a company is an inherently risky endeavor,” said Phil Santoro, co-founder of Wilbur Labs.
Based on a Wilbur Labs survey of more than 150 founders, 70% of entrepreneurs face potential business failures, 66% will fail within 25 months of their launch. Even though the IRS was receiving applications for new businesses–the height of which was during the summer of 2020–77% respondents said that they “faced potential failure” due, at least in part, to the pandemic.
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Why startups failed in 2020
The main reason startups in 2020 failed was due to: Running out of money (37%), no financing/investor interest (31%), no business plan or model (25.5%), lost focus (23.9), not the right team (22.8%), and/or outcompeted (21.7%).
The report from Wilbur Labs stated, “Although most startups cannot expect to generate profits immediately, they should have a break-even point and a plan to reach it.” Santoro quotes former Google CEO Eric Schmidt who often said, “Revenue solves all known problems.” Santoro observed, “Revenue can also solve unknown problems, as the COVID-19 pandemic has illustrated.”
How to prevent startup failure
“When talking with potential founders I always ask if they want to spend the next five or more years working on their idea,” Santoro said. “It takes a long time to build a successful company, much longer than most people think. About two years in, that’s when founders typically realize there is still much work that lies ahead. This is also when some of the initial excitement can wear off and there’s pressure to prove they’re solving a problem and the company has value. Two years in is usually a critical time where founders will need to decide if they continue pushing forward, pivot, or shut down.”
The Wilbur Labs report offered recommendations to prevent a startup failure, with being prepared and having a plan as being the most important:
- More research prior to launch 29.5%
- Stronger business plan 22.4%
- More financial backing/investors 13.5%
- Better marketing 13.5%
- Better product 5.1%
- Successful pivot 3.2%
- Better team 1.9%
- Other 1.3%
In a free-response section where respondents could enter any advice for founders, this theme persisted: A quarter of responses emphasized research, planning, and/or preparation. Only 6% said “just do it” or “go for it.”
Timeline of startup failure
Wilbur Labs chronicled the reasons for startup failures from 2014 to 2020, and those six years showed the causes changed dramatically. Money and financing, as might be expected, remained at the top of the list, and even have increased. Increases were seen in “a lack of market need,” which should not be interpreted as a loss of ideas, rather than a reflection of a lack of cultural, geographic, and socioeconomic diversity among founders and investors. Competition is also increasing.
Unfortunately, the days when founders could quickly and successfully launch an app or product have passed, and Wilbur Labs cite “too much noise out there” for this reason.
Finding success in startups: Be willing to pivot and plan
“Solving real problems that serve people better is even more critical now, given the sheer number of products competing daily for attention,” the report stated. Regulations and legal challenges may also have contributed.
Failure to pivot is another reason for startup failure; 55% of startup founders pivoted to avoid business failures and 44% of those felt comfortable with the chances of the business surviving. Overall, 75% of startup founders who pivoted were successful–learn from mistakes, iterate, and adapt quickly before the money runs out.
The most common pivot strategies are improve/change business plans (59.3%), improve existing products (40.7%), launch new product (39.5%), rebrand (22.1%), change team (16.3%), secure additional funds/investors (12.8%), and “other” (5.8%).
Since bad business planning is the third most common cause of failure, it makes sense that the majority of pivots involved changing existing plans.
Founder to founder advice: The most stated advice is “learn from mistakes that will be made” (58.3%). Other advice includes listen to your customers (53.8%), ensure there’s a market for your product (53.8%), create a solid business plan (53.2%), be passionate about your product (51.9%), and don’t be afraid to alter your product when necessary (42.9%), among other suggestions.
The glass is half full
Founders who are determined to form a startup will continue to try again, despite failure (67%). Wilbur Labs suggests that anyone planning to launch a startup should: Research, plan and prepare better; don’t leave money to chance; pivots raise the odds of success; and learn from shared mistakes.
Santoro is optimistic: “Despite experiencing business failure, 67% were willing to start another company. This is great news, as it often takes founders more than one attempt to succeed. Experiences and mistakes are the best teachers, and these types of lessons take years to build and compound.”