Why Startups Fail
Over the last decade ‘startup’ has been the coolest word in the business world. It’s no surprise really when you consider the huge success of Facebook and Amazon, both of which have amassed a value of more than US$500 billion in their relatively short existence.
As the startup world continues to flourish, Uber, Airbnb and SpaceX have capitalised on new markets gathering a combined value of US$120 billion, with Uber leading the pack at US$68 billion. However, if you look beyond the digital poster boys many startups struggle to make it through the first year, let alone reaching ‘unicorn’ status of US$1 million value.
No one goes into business wanting or expecting to fail, however, for the majority failure is the most probable outcome. Depending on where you get your figures, the startup failure rate is estimated at between 70% and 90% – whichever way you cut this it’s not good. To understand why so many startup companies fail to make it through the first vital years, CB Insights undertook a postmortem of 101 failed startup, the results were quite surprising.
There are many reasons why startups fail, twenty to be exact. The big surprise is that only 29% of businesses cite running out of cash as a reason for failure, which puts it at number two on the failure list. The first reason for failure, at 42%, is lack of market need for what the company is offering. This is a surprise because establishing a market fit is a fundamental of business.
Other results for failure include the wrong team (23%), pricing (18%), legal issues (8%), lack of focus (14%) and burnout (8%). Typically, marketing appears to be a challenge for many new businesses, however, the CB Insight research indicates that only 14% cite marketing as a reason for failure.
Despite the doom and gloom, the startup world is thriving. In 2017 the U.S. witnessed a decade high in startup company investments, with more than 8,000 deals closed to the value of US$84.2 billion. This demonstrates the continued opportunity for entrepreneurs to innovate and create valuable, but those entrepreneurs should do so acknowledging the mistakes of their fallen comrades. Do the research, establish a need, build a great team, build a great product, get the pricing right and you’ll be heading towards success.