Why Do Startups Fail?

Not all startups become Uber or Glovo, regardless of the desire of their founders and investors. Multiple researches and analyses conducted to date show that some 75-90% of startups created on the global market fail and make very sensitive losses for their founders. In this article, we tried to figure out why it happens and what a startup can do to avoid this risk.

Startup Failure – Industry Factor

So, you have accumulated certain experience, skills, and resources and you believe you have a unique business idea. And you decide to launch a startup to implement this idea for the benefit of the wide public and your own. You set up a management team, hire some staff and hit the green button to make the gears work. Your initial efforts are noticed by some venture capitalists who prove their interest in your startup and its idea by investing their money in your company, sometimes big money. Everything looks good but then the situation changes upside down and your startup fails. Actually, it is absolutely common nowadays, to see such a scenario. But is it a trend or is there something that is not visible but is very important for a startup’s well-being? And is your area of operation key to success or failure of your business?

In 2019, CB Insights conducted a post-portem study of over 100 startups to find out whether a startup’s industry plays any role in the failure.

The results received in the study show that the highest failure rate belongs to the IT industry, and it is not a surprise, in fact. The main cause for this is a fast growth of the industry and the entrepreneurs’ desire to jump in this fast car supposedly racing towards success. 

Failures occur as many investors and entrepreneurs buy into beautiful ideas that are seen profitable and beneficial for them. Instead of long and painful trainings in the real business world and projects, a lot of them find it much easier to believe in the hot deck and coffee grouts or rely on their friends’ advice and forecasts from experts and analysts. Some of them, perhaps, will find luck, but the ratio of such luckies is miniscule. In most cases, to achieve success, you need to overcome a lot of difficulties, live through multiple rises and falls until understanding, at a certain time, this success, that these rises, became recurring. It can take 5, 10, 15 or more years, or it may not happen at all.

According to the Startup Genome Report of 2019, over 90% of the launched startups die. More than 70% internet startups close their operations because of premature scaling, having overestimated their capabilities and enormously overmanned their staff. A half of all startups pass away within their first 5 years, according Delphi Group’s founder Thomas Koulopoulos.  

All this statistics means that any entrepreneur and any investor decided to partner with this entrepreneur will have maximum risks at the beginning of their joint journey.

Startup Failure – COVID-19 Impact

The risks mentioned above are extremely high today, when we all are facing the COVID-19 challenge. And the figures below prove that wery well.

The pandemic has affected and continues to influence virtually all industries, forcing both the large corporations and young startups to cut their revenues.

However, the fall and the calm seem to be past their peak values, and the businesses now start to slightly recover and create new jobs. The important point here is that new jobs are created today at young companies, which age is between 0 and 5 years. Right, these are startups.

Okay, let’s depart from the force-majeure risks and return to the standard problems that cause startup failures.

Top 7 Startup Failure Root Causes

We mentioned the CB Insights study on startups at the beginning of this article, and we would like to dwell a bit more on the results of this study. The CB Insight analysts did a great job and talked to founders, CEOs, and anchor investors of over a hundred of dead startups to find out what the main reasons for their death were. The obtained results were then verified and validated to elaborate the main 7 causes. Let’s have a closer look at each of them.

Cause #1. Bad Timing for Product Launch

If you launch your product too early, the users may ignore it as they can decide it’s not 100% ready. You know, it is very difficult to get them users back when their first impression of your product is bad. At the same time, late product launch may lead to missing the needed time and opportunities on the market and, respectively, missing the profits and audience. A good example of such a bad choice for the product launch time is Calxeda shutdown. Calxeda was a tech startup with million-dollar investments raised and with beautiful prospects in terms of development, but it failed due to attempts to implement the ideas that were too premature for that time – they wanted to promote low-power ARM CPUs to the server market. It’s very funny to read it today, when Apple announced their plans to switch their computers to ARM platform. But in the era of Calxeda, it was not the right time.

Cause #2 – Ignoration of Customers

It is one of the most confident methods to break your project. Inability to see further one’s nose and non-consideration of the customer feedback kill most startups. 

This almost happened to VoterTide, a social media intelligence company that was acquired by MindMixer in 2013. The company’s CEO stated that the company had not listened to customers and launched functions which seemed to be good for the company but weren’t needed by customers. The company didn’t understand that until a drastic fall that led to the company’s purchase by one of the competitors.

Cause #3. Bad Marketing

Knowledge of your target audience, ability to attract its attention and convert its representatives into leads and then into customers are the most crucial skills for successful business management. But many startupers, especially those who’d better code and develop the product rather than manage their company, lack another important feature – ability to market their projects.

Cause #4 – Absence of Business Idea or Its Wrong Validation

Business idea is one of the whales the entire business industry rests on. If you don’t have multiple pipes for your revenues and you cannot find ways to make money and bring profits, it is unlikely that investors will show interest in your project or product. And you won’t be able to capitalize on your efforts.

Cause #5 – Wrong Pricing Model

In many cases, startups fail even if they have great and innovative business ideas or if they create products needed by the whole world. It happens because of their greed. It means that they set too high prices for their products, thinking something like “We have an absolutely unique product. Nobody can offer something even close to ours. So we can put any price tag on it”. It doesn’t work this way. Our experience shows that the price should be high enough to remain affordable and low enough to cover the product production costs.

Cause #6 – Wrong Team

We understand that startups don’t have enough funds to hire top-notch professions. But it’s not the reason for manning the management or production team with your friends, relatives or alike, even if you think they are awesome and you trust them. If you don’t have persons capable of providing valuable assistance with the product launch, try to attract them as co-founders. Try to man your team with professionals with various skills. If you feel that someone on the team cannot cope with challenges, find and hire the person who will be able to do that. Use available incentives to make such people join your team.

Cause #7 – Insufficient Budget

Money management requires a wise approach. More than 25% of startups die because they make financial mistakes. In most cases, startups run out of money because they cannot find their spot on the market or they haven’t tested their products before entering the market. Some of them waste a lot of money on actions and events they don’t really need. To avoid this risk, spend some time finding a reliable funding source BEFORE the product launch, and not AFTER.

Startup Failure – How to Avoid

We understand that nobody is able to know everything and that it’s absolutely human to make mistakes. You won’t reach success without getting your initial bruises. It’s normal. But the main point is to have all your bruises as soon as possible, at the very initial stage, and then to only move further. If you analyze properly the main causes of a potential startup failure and take appropriate actions before not after giving your startup a good-to-go, you will avoid multiple risks and will become closer to your goal. 

From our experience, it is also always a good idea to have someone from the outside who would be able to look at the state of things with an uninterested eye and point out at your mistakes or areas requiring some improvement. There are multiple IT consulting companies that would be happy to help you with an initial audit, which will reveal what is missed and what needs to be fixed.

If you don’t know where to look for such consultations or how much it can cost, feel free to talk to our experts free of charge to shape out your next steps on the route of your big growth!

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