In his novel Anna Karenina, Tolstoy suggested that happy families were all alike, but unhappy families were each unhappy in their own way. The same, it seems, is not true of failed businesses. Instead, it is possible to identify common factors that are often associated with failure—and therefore to take action to avoid problems.

Market intelligence company CB Insights analysed over 100 failed start-ups to identify the reasons for their failure. They found that a massive 42% of these failed companies had tried to produce something for which there was no market need. Nearly a third had run out of cash, and almost a quarter had not had the right team in place. Drawing on this, and other analysis, here are some tips to help your start-up last the course.

1. Develop your business idea

The first step and possibly one of the most important is to have a good business idea.

Ideally, this should ‘play to your strengths’. That is, you should have some experience or expertise that makes you the best person to develop this business idea. This will help to give you credibility with both investors and potential customers, not to mention future employees. It will also make it more likely that this idea will actually solve a real problem.

There is more about this in our page on Developing a Business Idea.

2. Check that your product has a market

The next step is absolutely critical: check that there is a market for your suggested product.

Research shows that nearly half of businesses fail because there was no market need for their product. Make sure that you don’t fall into that category by doing good market research, and by being prepared to listen to the findings. Consider:

• You might think your product is a good idea, but do your potential customers agree? Are they already using something else that does the job—or is there actually no need for anything?

• Are there already other products meeting the same need?

• Will you be able to sell your product for the price that you need to charge to make a profit?

It is also worth remembering that most of us have what is known as ‘confirmation bias’. This means we are more likely to accept information that supports rather than contradicts our existing ideas. Try to avoid that by concentrating on looking for reasons why your product might fail rather than why it will succeed.

There is more about this in our page on Gathering Information for Competitive Intelligence.

3. Work out how (and when) you will make money

Your business needs to start making money as early as possible.

If you don’t make any money, you are not going to survive—and you will be reliant on investors or your own savings. How much are you prepared to put in before you can start taking money out? It is also worth considering how long you can survive with no income from your company.

You also need to think about when and how money will come into your company.

It is no good having enough money coming in each month if you still can’t pay your bills when they fall due. Cash flow is one of the biggest problems facing small businesses, and you need to get it right.

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4. Consider what legal form your business will take

The legal form of your business may seem like a triviality at this stage—but it can have huge implications.

The precise legal forms available to you will depend on your location. However, most countries have some kind of ‘one-person operation’ structure (in the UK, this is known as a sole trader), and various arrangements that limit the liability of shareholders and/or investors in some way. These may be known as limited companies, limited liability companies, or limited liability partnerships.

It is worth taking legal advice on the form that you use, because it has implications for your own liability, your taxes and the way that the business is taxed.

Some forms allow you to take an income, and the tax regime depends on the form of the income. Others allow you to pay all the tax personally, but you are also liable for the business’s debts and any other liabilities.

The form may also affect who needs to be involved in the business. For example, if you set up a limited liability company in the United States, you need a registered agent. This is the person who is responsible for receiving legal notices and documents from the state for your company. Different states have different rules about who can act as the registered agent (see box).

There is more about this in our page on Establishing a Company: Legal and Financial Aspects.

5. Put together the right team

As should be clear from the previous point, the legal form of your company has some implications for the team that you need to gather.

However, there are also other issues that you need to consider in putting together a team.

It may sound astonishing that not having the right team was a factor for almost a quarter of all failed businesses. However, this highlights a mistake that many would-be entrepreneurs make: not keeping it professional.

It often seems easiest to ask friends for help, especially if you don’t have enough money to employ professionals. However, your friends may not be as committed to your business as you are—or indeed as a paid employee, contractor or professional adviser would be. They may also not be as expert as you had hoped.

There is a simple lesson here:

You need to get the right advice from the start—and that means paying the ‘going rate’.

There is more about this in our page on Establishing a Company: People, Place and Promotion.

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In Conclusion

Setting up your own business is not easy.

Some estimates suggest that up to 90% of start-ups eventually fail. However, with the information on this page, it should be possible for you to do more to ensure that your fledgling business becomes part of the 10% that succeed.

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