I always thought startups have a lot of potential to be successful; however, little did I realize that they may lose a lot of money during their first year. So why do startups lose money?
Startups lose money because they’re focused on building growth for the long term. They’ll take some cuts when starting out if that’s offering lower prices.
Especially if it’s not what the marketplace demands, it can be a challenge. All in all, they’re focused on growth today before becoming profitable down the road.
In this article, I’ll go over why most startups likely fail. Also, I’ll lay out five reasons startups lose money while trying to grow.
- Why Do Startups Fail?
- Little To Poor Planning
- Spending Too Much On Expenses And Marketing
- Not Studying The Market Properly
- Lower Prices Before Raising Them Later
- Ineffective Communication
Why do startups fail?
Startups fail for a number of reasons, which include:
- Lack of cash flow
- Poor marketing
- Lack of expertise
- Lack of research (for their product or service)
- Not being in the right market
According to the U.S. Census Bureau of Labor (CBL) Statistics, about 90% of startups likely fail over time. In fact, there’s only a 10% success rate during the first year.
Another thing the CBL mentions is: After the first year in business, around 70% of new businesses may fail. So these are high numbers, with the likelihood of succeeding very low.
One of the biggest reasons for a startup to fail is likely not enough cash flow. When money is not steadily coming in, that can be a problem for growing a company.
Cashflow is the lifeblood of any business- it’s needed for growth. So cash flow is crucial for any startup to succeed.
Why do startups lose money?
Startups focus on growth and providing value before profitability. That means offering their product or service at a lower price. If the goal is to provide value to others while providing superior services, that will lead to long-term growth and success. Let’s dive into some reasons why they lose money.
Reasons why startups lost money
Little to poor planning
Not planning effectively can be common, especially if it’s designing a potentially breakthrough product. If the idea is not that good, it can turn out to be a flop.
For example, if your budget is not well planned out, you can lose a lot of money down the road. So things such as budgeting are needed for proper planning.
What do most startups struggle with?
In the beginning, cash flow is a big challenge for many startups. Besides cash flow, strategic planning and understanding the marketplace are two significant factors to consider. If they don’t plan accordingly or know who they’re supposed to target, it’ll be much harder to build long-term business growth.
Spending too much on expenses and marketing
If there are expenses (i.e. payroll), that can be a problem early on.
Why is that? If the business is not well-equipped with cash flow, scenarios such as laying off staff can take place.
Also, when it comes to marketing, spending money on advertising may not always bring immediate returns. It might be good to spend on ads, but you may lose a lot of money as well.
There’s a common saying out there, “You have to spend money in order to earn money.” That may be true in some cases, but not all the time.
When you’re spending money on ads you don’t understand well, that’s another case where you could end up throwing a lot of money down the garbage.
Do 90% of startups fail?
Based on the US Census Bureau of Labor statistics, about 90% of startups will fail. During the first year, there’s a 10% chance that may happen. That number may go up after a startup’s first year.
Not studying the market properly
A lack of understanding of the market can be a problem as well. If a startup doesn’t know what the market wants, it won’t put out a product that’s needed at the moment.
More so, not studying the market can lead to efforts going to waste. Studying trends and having analytics helps, so that’s something for startups to look into.
Many big companies have business analysts that look into studying patterns and current trends, which can help. It’s good to have those numbers to make better decisions in business.
Lower prices before raising them later
Oftentimes, startups may have to offer services at lower prices. That may not be the most accurate price, but it serves to test out the marketplace.
The purpose of doing that is to determine if a startup can provide value first. That should come first before they earn revenue.
If startups can do that, while providing excellent services, they can raise prices later on. If a product is proven to be worth of value, it may be best to raise the price and focus on the competition.
Is it normal for startups to lose money?
It’s very common for startups to lose money during their first year. It’s unlikely that a startup will be profitable in the first year of operations; moreover, the chances of failing are more likely for any new type of business.
Ineffective communication
Poor communication can lead to little or no growth in a business. By far, communicating with potential customers is key to long-term business growth.
Without proper communication, more people will be confused about your business. If people were to ask you, “How will your product or service help your average customer?”
A vague response may be along the line of, “Our product is better than the other ones on the market.” That’s likely not good enough, as you need to be more specific in your message.
Not being clear in your messaging will lead to people not wanting to do business with you. If you’re not a clear communicator, it’s going to be more challenging to acquire customers for your business.
A relevant article from notimekillers.com
Read next on “What Is The Importance Of Ethics In Business? 5 Reasons“, to learn why ethics is crucial to doing business with others better.
Final Words
It’s not uncommon for startups to lose a lot of money. As mentioned earlier, most startups are likely to fail early on.
It might be why a lot of people don’t attempt to start one in the first place. The reasons discussed earlier give you a better understanding of the risks startups can run into.
It’s not impossible to have a successful startup. The key thing to take away is understanding the risks that can play out.
Your Turn: Have you worked at a startup before?
I would like to get your thoughts on this topic. Have you worked at a startup, or do you currently work at one?
Have you attempted to start one of your own? If so, what were the biggest challenges you had to overcome?
Was something such as cash flow a big problem for operating the business? Did your product or service resonate well with customers?
Feel free to share your thoughts by leaving a comment below. I look forward to reading your responses, and I’ll gladly respond promptly.
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Eric is the owner and chief editor of notimekillers.com. He takes great pride in helping people manage their time and grow their businesses. Eric is a firm believer in financial and time freedom, as he believes in financial independence and taking ownership of your time. “Time is your most important asset. It can be your best friend or worst enemy. How you use your time can shape the future you desire to have.” In his leisure time, Eric loves to write and read whenever possible. He enjoys going for long walks outdoors while doing in-home workout videos every week. You can also connect with Eric via LinkedIn.
I couldn’t agree more; many startups lose money due to either one or all of the reasons you mentioned. This is exactly why when my sister-in-law approached me about putting up a pharmacy, I was very hesitant.
But after showing me her startup plan and well-documented research, I eventually agreed.
We started with just a couple of staff (a pharmacist and another one to tend to the customers. My sister-in-law took care of the cashier and medical supplier while asking for my husbands’ help with the inventory.
It was tough at first but we made a decision to stick with the business plan.
Three years down the road and we started seeing the fruits of our hard labor.
Thanks for an insightful post, Eric.
Hi Alice,
I understand how doubtful you were about that startup you did with your sister-in-law.
Fortunately, it’s worked out well on your end. As mentioned in this article, a lot of startups don’t end up successful as they intended to be.
So your scenario is one that ended up better than others. It’s worked out well for you, I can tell.
Thank you for sharing your story and thoughts- they’re greatly appreciated.