The boom of unicorn startups like Uber, Facebook, Spotify, and Airbnb makes it seem like startup success is fairly common. In reality, some studies estimate that startups have a failure rate of 50 to70%! They fail for a variety of reasons—  brilliant minds, money, and great technology just aren’t enough to keep a company afloat.

While there is no magic formula to guarantee your startup will succeed, being aware of the most common challenges can give you a leg up; in this case, what you don’t know can actually hurt you. Learn about the six reasons why startups fail and how you can avoid these common pitfalls!

The Most Common Challenges Startups Face and How to Overcome Them

Facing obstacles is part of being a business owner and no matter which industry you’re in, the same problems seem to arise. That’s why knowing what challenges you’ll face can help you prepare for potential risks.

The early stages for a startup can be crucial for success: they set the tone and reputation of your company. Give your company a winning chance by avoiding these six mistakes.

1. Money

It might sound like a no-brainer, but understanding the finances of running a business is crucial to the success of your startup. Whether you’re self-funded, equity-funded, or debt-funded you need to have a pulse on your financial position, not only to understand what’s going on in your company, but also to plan ahead: fund R&D;  roll-out and market products, services, or software; afford overhead expenses; and pay employees. The last thing you want is to run out of cash. 

What to do? Don’t leave the finances to someone else! If you don’t have a strong grasp on your balance sheet, income statement, and cash flow, it’s time to take a crash course or find a mentor.

Startups are often scrappy in the early stages out of necessity; however, as funding options and revenue increase, founders easily lose sight of where money is being spent. Stay on top of your finances, educate yourself, and keep a scrappy mindset!

“A great idea isn’t enough; before you waste time and money on a business it’s best to validate your idea. #startupsuccess”

2. Validation

Having a great idea isn’t enough to start a business; just because you build it doesn’t mean they will buy it.  Before you waste time and money on a business, test out the market by validating your idea. See if you can easily answer the following questions: Am I solving a problem? Is there a market for my product? Is my idea financially viable?

What to do? To validate your idea, you’ll need to do market research to see if your product or service alleviates a pain point as well as confirm if there is a market willing to pay for your solution. 

A basic first step is to tell people about your idea. Break free from your echo chamber of business partners and friends, and talk to people outside your circle for a fresh perspective. See what holes they poke and shortcomings they uncover and use that information to improve your idea.

Tim Ferriss and Noah Kagan often talk about selling an idea before its built. This means testing the idea through a landing page, Facebook ads, or pre-sales before you even create a product. If there’s enough interest, you may be onto something. Confirming an audience for your product or service is a key factor to success.

colleges at startup with laptop

3. Customer acquisition

No customers means no business. It’s as simple as that. While you may have validated your idea, that doesn’t necessarily mean your target market is going to come running.

No matter how good your product is, relying on word-of-mouth alone won’t cut it; you need to be proactive to sell your product. Acquiring customers is expensive, so have a clear idea about what it will cost and how you will acquire them. 

What to do? Work through your cost of acquiring a customer (CAC) and lifetime value of a customer (LTV). According to David Skok of For Entrepreneurs, entrepreneurs often realize that their business model might not work because their CAC is greater than LTV.

Spend time figuring this out so you know exactly what you’re getting into. Once you do and start gaining customers, be sure to provide excellent service. Listen to what customers want and adapt to their needs. Remember: they can make or break your startup, and you exist to solve their problem. 

4. Leadership

Most startups begin with just a few people working together who have their hands in all aspects of the business. They wear multiple hats and work in a flat organization, so management isn’t a big concern. However, as the company gains traction, you’ll need to hire more employees—this is where strong leadership becomes imperative to building a company!

As they say, “People leave managers, not companies.” While companies aren’t built on leaders alone, the right leader can have a pivotal impact on employees as well as a company’s success. You need a team to move forward, and cracks in leadership will affect the strength of your business.

What to do? Build your leadership skills, be a conscious manager and even find a mentor if this is your first time managing a team. Just because you’re a founder doesn’t mean you’ll have the chops to be a great manager. If you find that your energy is better suited for another area of the business, set your ego aside and hire a leader with experience. You don’t have to be good at everything—know what you do best and outsource the rest!

collegues laughing and holding hands

5. Marketing

It’s time to hustle. You’re a new kid on the block, which means that brand awareness and sales aren’t going to happen on their own. You need to have a solid plan and allocate resources to marketing your product or service.

The effect of marketing on revenue isn’t as direct as that of sales, which means that it’s value can be harder to pitch. However, a reason why startup often fail is due to a lack of marketing, poor strategy and skimping on the marketing budget. 

What to do? Don’t be stingy: set aside money for marketing and sales. How much should you allocate? What’s the best way to market your product? If you aren’t well-versed in marketing, especially social media marketing, start with Google and learn the basics.

However, in order to gain the biggest return on your investment and efficiently use your budget, it’s best to hire an expert:someone who understands your industry, the tools and data. With the right person, it’ll be money well spent.

6. People

The success of your startup will heavily depend on the team you build. People are the life force of the company so make hiring a priority and focus on getting it right! Understanding which roles you need to hire for is key, however, it’s also important to hire for synergy and culture fit.

Teams spend so much time together in the early phases of a startup, so alignment among employees can help drive innovation, boost engagement and create an environment conducive to success. 

What to do? Hiring is one of the biggest challenges for every company, regardless of size or years in business. Start by identifying your company values and think about the culture you’d like to have, then hire with those two pillars in mind. 

Be clear about what skills are needed and hire accordingly. Timing plays an important role for startups; getting the right people in place quickly can affect your success. But don’t get stuck in the pressure of trying to find the perfect candidate or you’ll waste precious time in analysis paralysis, especially if you company is scaling.

Take Gary Vaunerchuk’s advice: hire fast and fire even faster. You might not know if you’ve made the right decision until someone joins the team, but that’s okay, you can course correct if you need. 

Avoiding the Most Common Reasons Why Startups Fail

Although the failure rate for startups is high, don’t let it discourage you from turning your idea into reality! Being aware of the challenges you’ll face can help mitigate potential risks. Even though most startups fail, keep in mind that almost all successful startups have faced some kind of failure along the way, which is really just a stepping stone to success. Avoid the common challenges and give your startup a better shot at success!