Top 20 Reasons Why Startups Fail
Apple, Facebook, Amazon: these success stories have already turned to legends and continue to inspire respect, if not a light sense of being "almost unattainable".
But viewing social networks and blogs populated with the happy faces of lucky business people, who have managed to implement successfully their ideas, you have for sure asked yourself (at least, a couple of times): what prevents me from doing anything of the kind.
You know the feeling, don’t you?
No doubt, this is quite a challenge. The existing statistics add fuel to the controversy, as they show, that 8 (and according to some sources even 9) out of 10 startups fail.
Why do startups fail? And why is the failure rate so high?
Let’s check together.
Keep in mind, that a startup is not the same as the normal small business. Therefore, it should be:
- the business begins from scratch and no one has a similar experience to follow;
- no specialists are available, who would know how to arrange the work with this product/service;
- customers' reaction to a new product/service is unknown and unpredictable;
- any new, previously unknown product/service may not interest the investors or may cause their mistrust.
- there is not much time to boost: it either succeeds and begins making a profit, or fails.
Comes with effective business model
- startups specific features imply, that the business model is created from scratch under the absence of more or less well-tried experience. At the same time, it shall be effective for a new product and bring immediate result. This can be achieved through well-thought-out strategy and accurate measures for managing team and its activities;
- being new and unique the business model shall originally provide for possibilities of marketing development in the future. The task presents quite a challenge as things may develop in an unpredictable way.
Novelty, tight deadlines, high risks, and dynamic character. This factor mix may result both in huge profits and severe problems.
Based on our own experience and having studied the research presented by CB Insights, we would like to talk about 6 main factors you should not ignore, otherwise, you head for a disaster.
Further, follow 20 top failure reasons percentage (covering over 100 startups).
Please, be reminded: when studying the following percentage base, you should consider that there can be several reasons behind one failure.
Failure to take THESE into account will inevitably contribute to startup’s undoing
1. IDEA AND STRATEGY: no plan, no success.
The better you think over the idea of the product and the action strategy, the greater chances you have to achieve success and not to fall into the most common traps:
no market need - 42% of the startups failed
Any startupper is proud of his/her own idea, which presents to him/her a solution for some very critical problem. But in case the problem exists outside the market demand, the product will be of no interest to users
need/lack business model - 17% of startups failed
No product can be successfully sold without the business model. More likely this will result in loss of profits and clients, and finally in the complete project failure.
pricing/cost issues - 18% of startups failed
"I have invested so much money and efforts, and my product must pay off as soon as possible" - too high prices may seem justified for the business owner, but may also make customers turn away from the product.
At the same time, too low prices can additionally attract users, but will bring no benefit for the startup. The golden mean is never easy to be found“.
product mistimed - 13% of startups failed
A spoon is dear when lunch time is near: if the product appears ahead of its time, and most customers do not need it yet, the popularization process will protract; if on the contrary, similar ideas are already on the verge of sinking into oblivion, the project will simply fail to hit the market and go down.
bad location - 9% of startups failed
As early as at the initial stage the measures shall be taken into account that should be taken in order to avoid direct interrelation and dependence of the product recognizability and demand on the company’s location.
poor product - 17% of startups failed
Buying a new car or a washing machine, we wonder, whether it is easy to use and whether its functionality does suits our needs.
It is worth keeping this in mind, while creating your product; it will be selected by people like you, with the same doubts and expectations.
If the product fails to be user-friendly, it cannot be rescued either by funding, or excellent marketing, or a team of super professionals.
You will always need funds to create, maintain and promote the startup. And the circumstances will change: waiting for a payback, waiting for profits, waiting for financing from investors, etc. The point is that at any moment you should have money at hand, and you need to take care of it in advance.
ran out of cash - 29% of startups failed
Unreasonable and uncontrolled expenses will more than likely lead to the empty purse. The irresponsible approach and non-professional allocation of funds will result in the failure.
no financing/investor interest - (8%) of startups failed
The product may not be as bad, but if the team fail to interest the investors, does not maintain or incite the interest, performing successfully, the project is likely to stay with no funding at all, having failed to reach the level when it begins generating profit.
It is not enough to create a product and declare it to the world, to your ceiling and four walls of your house or friends and colleagues.
If you have launched the business, you should work through and through: do not spare time and money for smart marketers, do not discount expanding the boundaries of your own marketing knowledge and experience.
get outcompeted - 19% of startups failed
One would think, that the basic idea should initially be original and imply no pressure on the part of the competitors. But nowadays things develop so fast, that while one team enthusiastically implements own plans and struggles with any emerging problems, another team may appear with a similar idea, but more professional and better equipped. Marketing should help!
poor marketing - 14% of startups failed
The product is ready. But there are no customers. Customers-search takes time, and meanwhile the resources will come to the end. The sooner you begin with promoting the product, the better, since the product cannot advertise itself. No matter how cool the idea is, nobody can duly appreciate it being unaware of its existence.
ignore customers - 19% of startups failed
The product is created for the customers. This is their feedback that you need to listen to and react to as quickly as possible. Otherwise, the audience will be limited only to the team and their friends.
10% of startups failed due to pivot that gone bad and
7% due to failure to pivot
Display more flexibility. This does not mean you need to change the strategy just for the sake of changing it. The ability to timely and correctly respond to the impact of external and internal factors is half the battle. It is hard to abandon the original strategy, accept your mistakes and make a timely choice in favor of the new untried, but theoretically more profitable strategy. But this ability speaks about the business man maturity and professionalism.
Nokia’s case is a classic example of the pivot. At the end of the 19th century, the company emerged as a wood pulp mill, and by the mid-1990s, Nokia had already firmly taken the position of a world leader in the production of mobile phones.
Android history is another example of successful pivot. It began long before the release of Android 1.0 version in 2008. In 2003, the startup was launched that initially focused on creating an operating system for digital cameras. A drop in sales at the camera market led to a change in the company's strategy in favor of mobile phones. It was then that the company was acquired by Google, and this was the beginning of a great success story.
Team is your creative force. The professional qualities of IT developers, testers, marketers, lawyers, tax and finance specialists and any other team members, their psychological compatibility and focus on success will form the foundation for a stable and profitable business.
not the right team - 23% of startups failed
The diverse team may be formed by the members possessing widely differing skills and abilities. But at the same time it may lack the required expert/manager/marketing consultant in the specific case.
disharmony on team/investors - 13% of startups failed
If there is no common understanding and continuous contact between the team and the investors, within the team, between the co-founders, you risk staying at the stage of a good idea. Do not forget, a startup has no ready-made solutions, tried and true models. Teamwork is crucial.
lack passion - 9% of startups failed
If you haven’t turned on the heat, do not invest yourself completely into the idea, but rather see it as a source of income, the probability of failure increases.
Besides, if you have made up your mind to work in the unknown field, begin with plunging into and learning it. You should never forget that any startup is something new. And any new thing needs reliable foundation.
bad location - 9% of startups failed
From the point of view of remote team location, it should be taken into account whether the collaboration will not be impacted by long distances. How are you going to arrange communication? Are the specific needs of working in different countries (states, time zones) taken into account? How will the team be managed? Lots of similar questions will require a prompt solution. And we remember that the startup develops rapidly, do we? It will not allow any spare time to clear out these issues.
do not use network/advisors - 8% of startups failed
Do not forget about the investors: involve them at the early stage. They undoubtedly have some relations that would be of special value for your project. Do not lose any chance to use available opportunities.
burn out - 8% of startups failed
People are not light bulbs, but they may also burn out. Implementation of the original idea requires a huge investment of physical efforts and keeps us strung-up while requiring our total efficiency. This is not the task that everyone can cope with this.
lose focus - 13 % of startups failed
Having burned out or experienced the next failure the startupper may cool down and lose interest in the target to be achieved. As result, the business will lose the motivating force.
6. LEGAL CHALLENGES (8%)
Ignorance of the law is not an excuse. The legal aspect is present in every above item. This will be painful to lose business because of failure to consider some vital legal issue. Here are just some of the issues that you should note to reduce risks of failure for your next idea:
- legal status of the company;
- copyright protection;
- execution of contracts;
- memorandum of association;
- personnel employment documentation.
The given statistics is recommended to be taken into account, but do not take these figures as something stable and unchanging. Each story has its own problems that cause startups to fail, as well as possible ways to overcome any challenges faced with.
In addition, apart from internal managerial, organizational or financial problems, external factors can also impact success: state of the global market, force majeure, etc.
In her study, Waverly Deutsch, Clinical Professor of Entrepreneurship at the University of Chicago Booth School of Business presents interesting statistics.
It turns out that the percentage showing how many startups fail differs depending both on the activity field and the year of the project’s launch. The businesses that were launched in the USA in 2005 (before the financial crisis of 2007-2008) achieved lower success rate as compared to the startups launched in 2011.
At the same time, the following diagram shows that the rate of success changed in 2005 and 2011 depending on the industry concerned.
According to Statistic Brain the highest success rate is covered by the financial insurance and real estate fields: 58% of companies continue the activity after 4 years.
As you can see, startup as a business form is attractive since it allows you to achieve unattainable heights thanks to unconventional solutions.
Therefore, it is useless and ineffective to determine any common success formula. But you can take into account the previous bad experience and avoid repeating mistakes of others. And then, who knows, maybe your name will be next on the list of successful startuppers.
And we will always be happy to help you keep your ideas flying to success! Contact us right now!