The odds are stacked against startups. There are all kinds of things that can lead to a startup quickly closing its doors. No startup founder goes into their business thinking that they will one day fail. They may be afraid of it happening, but they wouldn’t start if they thought that things wouldn’t work out.
Usually there are warning signs that your startup might be heading down the path to shutting down. These signals are like the leaves turning colors in the fall. They’re a slow indication that things are getting ready for change. We often notice it, but the first cold snap or winter snowstorm still catches us off guard.
The following are a few of the major signals that your startup might be on the road to failure. The hope is that if you’re in one or more of these positions that you’ll be able to take a step back and look to see if there is a way to fix your business.
1. Running Low On Cash
Cash flow is the biggest item for just about all businesses. If you don’t have cash – any kind of cash – you can’t pay your bills. If your startup doesn’t have some source of cash and your reserves are running low then it’s a big signal that things could go bad really quick. The way to fix this would be to find another source of credit or to increase revenue in a hurry.
2. Difficulty Acquiring Leads And New Customers
Acquiring new customers is the lifeblood of a growing business. If you want to grow in the long-term you’ll have to find a way to acquire customers. You can dip into the well with current customers, but that’s more a short-term strategy. New customers are the key to growth.
If your company is struggling to acquire leads and customers it’s a sign that things are stagnating and you’ll be in a difficult position if current customers decide to go elsewhere.
3. Difficulty Lowering The Cost Of New Customer Acquisition
The other item with customer acquisition is having low cost customer acquisition. If you’re paying through the roof for leads and new customers you’re going to struggle to maintain that path for the long-term. Look at your margins and look at the trend of your customer acquisition costs. If the margins are staying low (or negative) and you’re not trending in the right direction then you’ll have to find a different, less expensive way to acquire customers.
4. Unable To Narrow Your Target Customer
It’s good to go into your startup with a narrowed target customer. But you might find that you attract different types of customers as you get going. This is fine as long as you start narrowing things down again once you figure out the best customer. If you find that your customer base keeps getting broader and broader you’re treading on murky waters. This can lead to your business trying to be everything to everyone and that can relate in higher costs and unsatisfied customers.
5. Increasing Co-Founder Disagreements
There will always be disagreements if you’re a co-founder or co-investor. When things are going well the disagreements can usually be swept under the rug for a while, but once things get going in the wrong direction (and it’s always cyclical) then the disagreements will start coming back into the fold.
Disagreements on their own aren’t bad. They can be healthy, but usually if the disagreements start to increase in frequency then you’re looking at trouble. It’s usually a sign that things with the business are increasing stress or that the co-founders no longer have the same vision for the business. You’ll either have to fix what’s causing the stress or you’ll have to find a way to separate the founders.
6. One Or Two Clients Accounting For Too Much Revenue
I’ve seen this one happen to a few businesses. Things can be going great, but if your business is built on one or two clients then you’re putting the company at a huge risk. That customer can decide to go somewhere else without any notice and you’ll be left with a huge payroll and bills you could only pay with that money coming in.
I know the founders of Basecamp wrote about this at one point. They talked about having many customers paying the same or about the same amount. This way they weren’t strapped to one customer and they weren’t in huge danger if a few decided to leave.
There is nothing wrong with big customers, but understand that they can leave at any time. Bring in more like them to offset the risk and don’t invest in permanent infrastructure based on the future revenue from them.
7. Overly Optimistic Estimations
If you don’t believe in yourself then nobody else will. Optimism is good in business, but if you’re constantly thinking that things will work themselves out you’re setting yourself up for failure. It’s better to be always preparing for the worst. Bad things happen to every business. It’s just a matter of when. If you’re prepared for those situations (like having extra cash on hand) then you’ll be able to handle them and see it through until the upswing.
Are you seeing some of the signals above?
Hopefully your startup is off to the races and doing great. There are some great startups out there that experience great growth and handle the issues that arise with the proper response.
But many struggle and signals pop up and eventually things go south and often they go south in a hurry. Hopefully you’re able to recognize what is happening and get things turned around before it’s too late.