Everyone’s seen the data: Ninety percent of startups fail. Less aggressive, but equally deflating, data indicates only 50 percent make it to their fifth year.

But what none of the data provides is a way for fledgling businesses to identify failure looming on the horizon.

While scary statistics are certainly good motivators and useful for setting realistic expectations among first-time entrepreneurs, they don’t empower entrepreneurs to learn from others’ mistakes. With so many business owners apparently failing at establishing stable businesses, they must have piles of information on what went wrong and what they would have done differently.

Luckily, a few entrepreneurs have pinpointed red flags that signaled things weren’t going as well for their businesses as they’d initially hoped. Here’s what new business owners should look to avoid.

1. Don’t underestimate how big a role experience will play.

“I was not a baker to begin with, just someone who wanted to buy a business. So we found an already established company for sale. We thought, ‘How hard can it be?’” Lori Karmel, owner and president of We Take The Cake, a cake boutique, said. “Spoiler alert: It can be really hard.”

Karmel said it became clear quickly that the company’s leaders didn’t need to just know how to run a business -; they also needed to be experts on the business’s industry. She explained that they had to step back a few paces and learn how all the pieces fit together to make the bakery’s products and how the products stacked up to competitors’. While owners who have franchise resources or industry mentors may not have the same experience, research, trade shows, and networking were helpful in helping Karmel and her team recalibrate.

But that’s not where the work ended: “You can achieve expert status in an intellectual way, without having actual experience or deep understanding. We Take The Cake reached a point where we believed we knew what we were doing. We had the public name, we had the big numbers -; but we had absolutely no idea what our actual sweet spot was, which led to some failed attempts at franchising and pop-up retail locations,” Karmel, also a member of Entrepreneurs’ Organization, explained.

An abundance of confidence may not wave a big red flag, but it’s often a precursor to a stumble for a company just coming into its own. Owners who don’t have a lot of experience or expertise in their field should pause and ask, “What don’t I know?” when they start to think owning a business is easy.

2. Remember that without customers, there’s not much of a business.

Suhail Algosaibi, a fellow EO member and a serial entrepreneur, said he’s seen many people forget about targeting actual customers in all their efforts to start a business. They get fixated on the nuts and bolts of opening a business -; creating processes, building a website -; that they forget to do the marketing required to drive interest and fuel early adopters of their service or product.

“Several years ago, I flirted with the idea of starting a children’s barber shop. A family friend had a similar idea, and we talked about the possibility of a partnership,” he said. “Most of my thoughts about the potential new business were about how to attract families and how to stand out in the market. Most of her energy went into the design, color scheme and even the fabric of the chairs!”

But he found, too, that businesses must realize where their target market stands, both in terms of values and finances. When Algosaibi’s own DreamBody Centre, a weight loss center, closed, he observed, “As soon as the government subsidy reductions were announced we saw our sign-ups drop. It was clear that as the cost of living went up for people, things like weight loss and wellness expenditure went down. We’re a luxury that few people can -; or want -; to afford right now.”

Identifying the ideal audience for a product is key to establishing a long-term business, but not keeping tabs on the other circumstances impacting audience members creates an opening for red flags to pop up where they’re least expected. As Algosaibi himself says, it’s important for owners to have multiple sources of customers to stay afloat.

3. Prioritize speed over perfection.

Mary Juetten, the founder of Traklight, a software firm that identifies and helps protect intellectual property, says she understood how to envision the company’s software utility, but without any coding experience or knowledge, she was in a difficult position when she no longer had her tech-savvy co-founder.

She hired the tech business that offered her the best deal, and the business told her it had to abandon the agreed-upon coding language to build the site in another. “If someone designing my website came up to me and said, ‘You should use this color instead of that color,’ I'd be asking 17 questions about why,” Juetten said. “But I never asked why about this, because it was technology.”

The coding shift resulted in a development timeline that more than tripled. “With technology, it’s all about time to market,” she explained. She educated herself so the same situation couldn’t occur again, but the business’s insistence on doing things a specific way delayed her own business’s launch.

Tech businesses tend to run into this problem more often than others, but the quest for a more sophisticated interface, a more appealing assortment, or a more impressive array of functions can doom any entrepreneur. Abandoning a lean mentality of creating a prototype that’s useful and viable is dangerous, particularly if it holds an entrepreneur back from learning directly from customers what they want or what needs to change.

While it’s good to have a realistic view of how many entrepreneurs succeed in the competitive business world, it’s even better to have insight into what helped them succeed -; or set them up for success the second time around. Red flags are often waving when a business is in trouble, but catching them before failure -; not after -; is the key.

Published on: Apr 19, 2018
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