“What are the reasons startups fail?”
While all the media is busy blowing the success trumpet of a few startups, one significant percentage statistic is eluding them, and in turn it’s the masses. 71%.
Yes! 71% of the small businesses fail over the course of 10 years. In a study by Statistic Brain, Startup Business Failure Rate by Industry, the failure rate of all U.S. companies after five years was over 50 percent and over 71 percent after ten.
A micro-small fraction of 0.07% small businesses become billion dollar companies. According to research done by Cowboy Ventures, Only 39 companies have reached the $1 billion valuation mark. This is just 0.07% of the tech businesses.
Since many startups offered multiple reasons for their failure, you’ll see the chart highlighting the top 11 reasons doesn’t add up to 100% (it far exceeds it).
Following the chart is an explanation of each reason and relevant examples from the postmortems.
There is certainly no survivorship bias here. But many very relevant lessons for anyone in the entrepreneurial ecosystem.
It’s worth noting that this type of data-driven analysis would not be possible without a number of founders being courageous enough to share stories of their startup’s demise with the world. So a big thank you to them.
1 No Market Need
Tackling problems that are interesting to solve rather than those that serve a market need was cited as the No. 1 reason for failure, noted in 42% of cases.
As Patient Communicator wrote,
“I realized, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office.”
Treehouse Logic applied the concept more broadly in their post-mortem, writing,
“Startups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behavior, great reputation as a though leader, great expertise, great advisors, etc, but what we didn’t have was technology or business model that solved a pain point in a scalable way.”
Kolos was direct about its biggest mistake:
“With Kolos, we did a lot of things right, but it was useless because we ignored the single most important aspect every startup should focus on first: the right product.”
A month after Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris started the Y Combinator seed accelerator in 2005, they picked “make something people want” as their motto.
Our study shows that failing to do this is one of the easiest ways to guarantee startup failure.
2 Not The Right Team
A diverse team with different skill sets was often cited as being critical to the success of a company. Failure post-mortems often lamented that “I wish we had a CTO from the start,” or wished that the startup had “a founder that loved the business aspect of things.”
The Standout Jobs team wrote in the company’s post-mortem,
“…The founding team couldn’t build an MVP on its own. That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t.”
In some cases, the founding team wished they had more checks and balances. As Nouncer’s founder wrote, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.”
At Zirtual, which was forced to lay off 400 employees overnight after a series of financial mistakes and miscalculations, co-founder and CEO Maren Kate Donovan later admitted that one key mistake was not bringing a CFO onto the board:
“If [a board] had actually been in tune, this would have been caught like six months ago… I blame myself on a lot of this, in not hiring more experienced people, but it wasn’t any maliciousness beyond just naivete… In retrospect if we had a senior finance person and a senior ops person it would have been a completely different story.”
3 Get Outcompeted
Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space. And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 19% of the startup failures.
Mark Hedland of Wesabe talked about this in his post-mortem stating:
“Between the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly. Everything I’ve mentioned — not being dependent on a single source provider, preserving users’ privacy, helping users actually make positive change in their financial lives — all of those things are great, rational reasons to pursue what we pursued. But none of them matter if the product is harder to use.”
Children’s apparel delivery service Mac & Mia found itself in a tough spot competing with highly successful companies like Stitch Fix and shut down only a year after its 2018 launch:
“Mac & Mia faced a host of competitors in the children’s delivery box space, including the aforementioned Stitch Fix, which launched its kids clothing service in 2018. Stitch Fix went public in 2017 and has a market cap around $2.7 billion. At least 20 other upstarts have launched similar delivery services for children’s clothes.”
4 Pricing / Cost Issues
Pricing is a dark art when it comes to startup success, and startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers.
Delight IO saw this struggle in multiple ways, writing,
“Our most expensive monthly plan was US$300. Customers who churned never complained about the price. We just didn’t deliver up to their expectation. We originally priced by the number of recording credits. Since our customers had no control on the length of the recordings, most of them were very cautious on using up the credits. Plans based on the accumulated duration of recordings make much more sense for us and the number of subscription showed.”
The 2019 shutdown of genetic testing and scientific wellness startup Arivale came as a surprise to many partners and customers, but the reason behind the company’s failure was as simple: the price of running the company was too high compared to the revenues it brought in:
“Our decision to terminate the program today comes despite the fact that customer engagement and satisfaction with the program is high and the clinical health markers of many customers have improved significantly. Our decision to cease operations is attributable to the simple fact that the cost of providing the program exceeds what our customers can pay for it. We believe the costs of collecting the genetic, blood and microbiome assays that form the foundation of the program will eventually decline to a point where the program can be delivered to consumers cost-effectively. Regrettably, we are unable to continue to operate at a loss until that time arrives…”
5 Product without A Business Model
Most failed founders agree that a business model is important – staying wedded to a single channel or failing to find ways to make money at scale left investors hesitant and founders unable to capitalize on any traction gained.
As Tutorspree wrote,
“Although we achieved a lot with Tutorspree, we failed to create a scalable business … Tutorspree didn’t scale because we were single channel dependent and that channel shifted on us radically and suddenly. SEO was baked into our model from the start, and it became increasingly important to the business as we grew and evolved. In our early days, and during Y Combinator, we didn’t have money to spend on acquisition. SEO was free so we focused on it and got good at it.”
At Aria Insights, the concept of outfitting drones with sensors to collect data from extreme environments seemed promising. But while the company got off the ground and found a few high-profile investors — including Bessemer Venture Partners — it ultimately couldn’t find a compelling use for that data, and therefore couldn’t adequately monetize its business model:
“CyPhy Works rebranded as Aria Insights in January 2019 to focus more on using artificial intelligence and machine learning to help analyze data collected by drones. ‘A number of our partners were collecting and housing massive amounts of information with our drones, but there was no service in the industry to quickly and efficiently turn that data into actionable insights,’ Lance Vanden Brook, former CyPhy and current Aria CEO said at the time of the rebranding.”
6 Poor Marketing
Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. But an inability to market was a common failure especially among founders who liked to code or build product but who didn’t relish the idea of promoting the product.
As Overto wrote,
“Thin line between life and death of internet service is a number of users. For the initial period of time the numbers were growing systematically. Then we hit the ceiling of what we could achieve effortlessly. It was a time to do some marketing. Unfortunately no one of us was skilled in that area. Even worse, no one had enough time to fill the gap. That would be another stopper if we dealt with the problems mentioned above.”
7 Loose Focus
Getting sidetracked by distracting projects, personal issues, and/or general loss of focus was mentioned in 13% of stories as a contributor to failure.
As MyFavorites wrote at the end of its startup experience,
“Ultimately when we came back from SXSW, we all started losing interest, the team was all wondering where this was eventually going, and I was wondering if I even wanted to run a startup, have investors, have the responsibility of employees and answering to a board of investors.”
Similarly, the post-mortem for e-commerce startup DoneByNone, cites a lack of focus and its effect on the customer experienced as reasons for the company’s demise:
“Here’s the long story: we’re a small start-up, and as you can imagine, life has been quite tough for small e-commerce retailers – and we went to hell and hopefully are on our way back from there. While we were focusing on other things that needed solving, we took our eyes off you and your issues.”
8 Failed Geographic expansion
Location was an issue in a couple of different ways. The first was that there has to be congruence between your startup’s concept and location.
As the location-aware instant messaging service Meetro wrote,
“We launched our product and got all of our friends in Chicago on it. We then had the largest papers in the area do nice detailed write-ups on us. Things were going great …The problem we would soon find out was that having hundreds of active users in Chicago didn’t mean that you would have even two active users in Milwaukee, less than a hundred miles away, not to mention any in New York or San Francisco. The software and concept simply didn’t scale beyond its physical borders.”
Location also played a role in failure for remote teams. The key being that if your team is working remotely, make sure you find effective communication methods, otherwise lack of teamwork and planning could lead to failure.
As Devver wrote,
“The most significant drawback to a remote team is the administrative hassle. It’s a pain to manage payroll, unemployment, insurance, etc in one state … for a small team, it was a major annoyance and distraction.”
9 No Financing / Investors Interest
Tying to the more common reason of running out of cash, a number of startup founders explicitly cited a lack of investor interest either at the seed follow-on stage (the Series A Crunch) or at all.
Smart earbud startup Doppler took hundreds of meetings to try to raise the necessary capital, but investors just didn’t seem to believe in the general market:
“The market has shifted remarkably for hardware. We are incredibly bullish on the Here Two, and the OTC Hearing Aid Act has passed, but we need real capital to do it. The feedback we continually got is, ‘we are not investing in hardware, and we especially are not investing in hardware at these numbers.’ It’s too high a risk even for the Valley.”
A similar fate befell the “real time reconnaissance platform” Shnergle, which shut down in 2013 due to an insufficient amount of available “risk capital” in its geographic region:
“Does your idea only § at scale? If your idea can only be monetised at scale, head to San Francisco / Silicon Valley. There isn’t enough risk capital, or enough risk appetite, in the UK/EU venture market to pour capital into unproven R&D concepts. If you want to build in the UK, find some way of charging money from day one. You can still use a freemium structure to up-sell later. Shnergle was never going to monetise before it had scaled fairly significantly. Fail!”
Lastly, sometimes companies can’t raise the money they need is because one of their competitors already did. This was the case for Sidecar, which raised more than $35M for its ride-sharing and B2B delivery service before being forced to sell to GM in 2016:
“In short, we were forced to shut down operations and sell. We were unable to compete against Uber, a company that raised more capital than any other in history and is infamous for its anti-competitive behavior. The legacy of Sidecar is that we out-innovated Uber but still failed to win the market. We failed – for the most part – because Uber is willing to win at any cost and they have practically limitless capital to do it.”
10 Didn’t Use Network
We often hear about startup entrepreneurs lamenting their lack of network or investor connections, so we were surprised to see that one of the reasons for failure was entrepreneurs who said they did not properly utilize their own network.
As Kiko wrote,
“Get your investors involved. Your investors are there to help you. Get them involved from the start, and don’t be afraid to ask for help. I think we made the mistake early on of trying to do (and know) everything ourselves, perhaps out of insecurity over being so new to the business world. This is a mistake.”
Work-life balance is not something that startup founders often get, so the risk of burning out is high. Burnout was given as a reason for failure 8% of the time. The ability to cut your losses where necessary and redirect your efforts when you see a dead end was deemed important to succeeding and avoiding burnout, as was having a solid, diverse, and driven team so that responsibilities can be shared.
What can make conversations about burnout difficult, especially in Silicon Valley, is the widespread belief that building a successful company will always involve some degree of possibly hazardous overwork. As Uber board member and CEO of Thrive Global Arianna Huffington puts it:
“The prevalent view of startup founders in Silicon Valley is a delusion that in order to succeed, in order to build a high-growth company, you need to burn out.”
At the same time, various founders have spoken up about how damaging burnout can be. Former Zenefits CEO Parker Conrad has said,
“I think people are unprepared for how hard and awful it is going to be to start a company. I certainly was.”