- Many startups fail within the first year, with poor finance management being a common cause.
- To succeed, startups need to focus on customer demand, product quality, efficient management and leadership, research, and financial management.
- Poor finance management can lead to cash burnout, inefficiency, unforeseen expenses derailing your plan, unsustainable growth rates, and inadequate investor relations.
- To avoid these issues, startups should implement effective budgeting practices and financial strategies.
Running a startup can feel like a rollercoaster of ups and downs. One moment, you’re feeling on top of the world — thrilled with your business’s progress in such a short amount of time. The next, it feels like all your hard work is unraveling, as if every success was only meant to be fleeting joys.
Forbes reports that 90% of startups fail during the first year, whereas only 10% find a way to flourish. Why is it that such a high number of starts end prematurely while only a few can survive the first few years? A straightforward answer is poor money management. 7 Figures Funding explores why some startups thrive while others fail too prematurely and cover what entrepreneurs need to keep their dream projects going for as long as possible.
Top Reasons for Startup Failures and Success
Before we go over poor money management, let’s discuss some specific reasons for startup failure and success.
1. Lack of Customer Demand
Startups usually focus on a particular market or audience and don’t need to meet all customer demands. Without enough customer interest, a startup will likely fail. However, those that produce products and services that create interest in a large audience would remain sustainable as they can gain, retain, and grow their customer base.
2. Poor Product Quality
If a startup produces low-quality products or services, it’s unlikely to succeed in the long run. Customers want something reliable and trustworthy. If a startup fails to deliver, it won’t be able to build loyalty among customers. Startups that have failed due to producing low-quality products include OLPC’s “$100 Laptop.” On the other hand, Tesla and Amazon are startups that succeeded because they focused on making high-quality products.
3. Poor Management & Leadership
Strong management is essential for a startup to succeed. Many startups fail due to mismanagement, lack of organization, or improper handling of resources. Without strong leadership, a startup can’t make sound decisions that will stand the test of time. Teamwork and communication are also.
4. Lack of Product Testing
Product innovation-based startups often fail due to a lack of testing. According to reports, 85% of U.S. products fail as they’re not tested enough. Startups need to pay attention to details and rigorously test the product before releasing it in the market. Otherwise, they may end up having a faulty product.
5. Lack of Research
Research is the key to success for any venture. Startups need to understand their target market, know what they want and how they will respond. Research failure can cause the failure of products like the Amazon Fire Phone due to a lack of research into customer needs.
6. Poor Money Management
Being Cash-strapped is a common problem faced by startups, and it’s not something to be taken lightly. Poor management, such as making careless investments in the wrong projects or spending too much on marketing campaigns, can lead to cash burnout and the failure of a startup.
Why Money Management and Startup Funding Should be The Main Priorities of Startups?
Although startups can have several reasons for their premature failure, the most common is improper management of finances. Here’s why finance management plays a crucial role in startup success:
1. Leads to Cash Burnout
Companies, especially during the startup, require substantial capital. Entrepreneurs can use Kickstarter campaigns, angel investors, or other startup funding channels to operate smoothly. However, if they don’t manage their finances properly can quickly run out of cash and be unable to continue operations.
2. Need to Maximize Efficiency
In the startup world, there’s no room for inefficiency. Startups have limited resources and limited time to make it big. Proper finance management is essential to ensure that those scarce resources are being used in the most efficient way.
3. Unforeseen Expenses Can Derail your Plan
Unexpected expenses are the hidden threat that can quickly derail a business plan. Without proper financial management, startups may not have enough capital to handle these unforeseen expenses and fail as a result.
4. Poor Investor Relations
Startup investors often look to invest in projects with good potential returns. Poor finance management can put off investors, resulting in fewer opportunities to raise funds. It can be a massive blow to startups, as they need money to grow and expand.
5. Unsustainable Growth Rate
With inadequate financial planning, startups may not be able to sustain their growth rate in the long run. Without proper cash flow management, they cannot fuel their growth and end up stagnating or declining in the market.
Real-Life Examples of Poor Money Management Leading to Startup Failure
Once dubbed as a “unicorn” worth $9 billion, this Silicon Valley startup ended up being nothing but a giant scam. The company was founded by Elizabeth Holmes with claims of revolutionizing blood testing with a single drop of blood and a proprietary device. But in reality, none of their claims were true. Eventually, they had to file for bankruptcy due to their poor money management and lack of transparency.
Clinkle was a company that tried to revolutionize digital payments using mobile phones. Unfortunately, the product never reached its full potential, and the company had to close shop soon after. Poor financial decisions were at the core of this failure as Clinkle’s founders failed to properly manage their investors’ money and make use of it in the most effective way.
Bodega was a tech startup that aimed to revolutionize the convenience store industry. Although it initially gained traction and raised $2.5 million from venture capitalists, it had to shut down in 2019 because of budgeting issues and a lack of proper cost-control measures.
All these examples demonstrate how poor money management decisions can lead to a startup’s closure, even when it has achieved initial success and raised venture capital.
To avoid such issues, startups must implement effective budgeting practices and financial strategies to ensure they have enough funds to continue operations. They should also develop a plan for long-term sustainability by understanding the potential risks of their investments.
Related: 8 Reasons Your Startup Needs Funding
In the end, startup success or failure depends on various factors. Still, poor money management is one of the common causes of premature closure. To ensure long-term success and sustainability, startups should develop effective financial strategies that reduce risk and optimize resources. With proper planning and budgeting, entrepreneurs can ensure their startups will remain afloat for years.
Ensure Proper Finance Management with Our Financial Application in Los Angeles, CA
7 Figures Funding allows you to monitor your personal and business finances in real time so that you can always be aware of your financial situation. With our easy-to-use interface, you can see exactly how profitable your business is and make informed decisions about where to invest your money.
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