Why Startups Fail (And How to Avoid the Traps)

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Why Startups Fail (And How to Avoid the Traps)

Major Canadian cities Vancouver and Toronto were recently ranked as the 15th and 16th best cities to start a new company. The ecosystems are prime for business growth but many startups remain just that: they fail to grow into full-fledged, successful business, having stumbled over one of the many traps that startups can fall into.

Besides having a brilliant idea, there are many reasons why some startups succeed and others just don’t! Here are some common mistakes that startups make, and how to avoid them.

The Inability to Pivot

When you start a new business, you start with a particular problem you’re hoping to solve for your future clients. However, it’s important to remain adaptable. If your initial plan isn’t working, it may be time to look at opportunities to pivot.

Let’s say you started out marketing a service to millennials. The need and demand is there, but in order for you to make money, your cost is unattainable to a younger generation. Many companies fail to recognize this and simply keep trying, pour money into marketing and advertising. Smarter business owners will see the value in pivoting - perhaps the cost of altering your brand’s image to appeal to a different generation.

Listen to your customers. Listen to your market. Listen to your finances. You’ll find your answers!

Not Structuring for Growth

Structuring your business for long term success and growth means speaking to experts early on in the process. Talk to a tax planner or business advisor before you make decisions that could hurt you in the long run. For example, many entrepreneurs will rush to incorporate, but there are circumstances where postponing incorporation can be a better financial decision.  

Not Understanding your Cost of Acquisition

If your business is solving a problem you know your consumers have, it can be tempting to assume that people will adopt your service readily and immediately. It can be expensive to attract and retain your customers, so pay careful attention to your cost of acquisition versus the lifetime value of a client.

Developing strategic business and marketing plans are crucial to understanding your true cost of acquisition. Paying attention to your financials every step of the way is important to every element of your business’ success.

Early on, your should be capturing as much financial data as possible through good bookkeeping.  In the long-run this data could become very valuable for decision making.

Having High Overhead Costs

When a small business is experiencing its first wave of success, it’s important to start investing back into the business. Deciding what to invest your money in can make or break your business.

Startups, particularly in the tech industry, are known for having flashy office spaces (we all know the cliche - the trendy warehouse space, the ping-pong table, the bean bag chairs). While rapid growth will require a functional office space for employees and meetings, some startups invest far too much in this.  Ultimately, rent is an overhead cost that takes away investment dollars for other, potentially more lucrative investment opportunities.  

So where should you invest? Well, that will be unique to each company. However, the strength of your business will always come down to investing in your process, investing in your people, and investing in your product.

Burn Out

When you’re passionate about your startup, you’re going to be investing a significant amount of your own time, energy and money into its success.

Invest in employees that you can trust to manage elements of your business. Rely on trusted business advisors for advice. Outsource the elements of your job that you can’t do, or don’t enjoy doing. The cost of paying for these services will free up your time to focus on what you love and need to do, plus will prevent you from burning out by taking on too much unnecessary stress and work.

Ignoring the Numbers

Entrepreneurs often rely on year-end accounting rather than monthly bookkeeping, thinking they’re saving money. But without accurate financial tracking and data each month, you can be missing out on valuable financial data that will help project your overall costs and cash flow.

Outsourced bookkeeping and cloud-based accounting programs like Xero are cost-effective solutions to startup financial challenges. Ensuring your financials are being reconciled monthly by an expert will help you keep your finger on the pulse, without needing to invest significant administrative time yourself.

With integrated analytics programs, your monthly financial records can help spot problem areas or opportunities early on. Better yet, your financial data provides sound evidence to investors who are looking to invest in a company with proven growth opportunities.

Are you a startup entrepreneur? We’d love to hear about your business and how our professional bookkeeping services can help you focus on the growth of your business.

Omar Visram
About Omar Visram
Omar Visram is the Co-founder and CEO of Enkel Backoffice Solutions Inc. Headquartered in Vancouver, Enkel provides bookkeeping, payroll, accounts payable and accounts receivable services to over 300 organizations Canada-wide.