Ever heard a young vibrant entrepreneur make a pitch?
The enthusiasm, the passion in his voice, the world-changing dream, the billion-dollar idea, the competent team; this must be the next Mark Zuckerberg.
Sadly enough, 90% of those big ideas die along the way and even more worrisome is that 20% of these failures happen within the first year. (Exploding Topics)
But why do so many end disappointingly?
Well, there’s an endless list of reasons why startups fail.
But, the goal of this article isn’t to list them all for you, but rather to point out some of the most pertinent but often trivialized causes of these shattered dreams.
This article combines open-access resources and proprietary data to present accurate, up-to-date statistics and relevant developments in the startup economy.
Our methodology involves:
While we strive for accuracy, trends in the startup space are shifting rapidly.
These statistics reflect current patterns and should not be considered permanent facts.
Startups are usually entrepreneurial ventures in their early stage that seek to disrupt traditional industries and change the status quo.
These young businesses often launch out with intentions to offer novel products or services that are cheaper, sustainable, efficient and easily accessible to the consumers, in a way that beats the traditional system.
They use technology in their offerings, and dream of generating eye-popping valuations that can lead to an initial public offering (IPO) and an astronomical return on investment.
According to Exploding Topics, there were over 150 million startups by the end of 2023, with over 1,200 of them ranking as unicorns (billion-dollar startups).
You may be most familiar with Big Tech companies—like Facebook, Apple, Netflix, Google, who exemplify successful startups in their early days, but the irony of life is - no one remembers failed projects.
On a plain level, a startup works like any other company, but the distinguishing factor remains the scope and approach.
While regular companies duplicate what’s been done before, startups aim to create an entirely new template.
A prospective restaurant owner may franchise an existing restaurant. That is, they work from an existing template of how a business should work.
But a startup is thinking of offering meal kits, like Blue Apron or Dinnerly, to provide the same thing as restaurants—a meal prepared by a chef—but with convenience and choice that sit-down places can’t match.
In turn, this delivers a scale individual restaurants can’t touch: tens of millions of potential customers, instead of thousands.
Another key factor that distinguishes startups from other companies is speed and growth.
Oftentimes, a startup will begin with a basic skeleton of a product called a minimal viable product (MVP) that it will test and revise until it’s ready to go to market.
They do this through a process called iteration in which they continuously improve products through feedback and usage data, often working longer hours (60+ hours a week) as against traditional businesses.
Startups generally raise money via several rounds of funding:
These are most likely not the only reason for failure, but they’re sure the do-or-die considerations you cannot overlook as a founder.
Startups most times fail because they fail to develop a product that meets the market need.
Ideas in the mind can be so wonderful but sometimes loyal friends and colleagues fail to give the much-needed criticism and feedback about the market desirability of a product.
The problem can either be due to a misaligned execution strategy or it can be a far more strategic problem, which is a failure to achieve Product/Market fit.
Most of the time, (42%) the first product that a startup brings to market won’t meet the market need.
In the best cases, taking a few reviews helps to get the product/market fit while in some cases, the product will be way off base, and a complete re-think is required.
If this happens, it is a clear indication of a team that didn’t do the much-needed minimal viable product (MVP) development work to get out and validate their ideas with customers before launching into the market.
In most successful cases, it takes about 50 conversations with customers who are not friends to find out if the product concept is really going to sell. (For Entrepreneurs)
Unfortunately, most founders come from a technical or product background. This makes it very uncomfortable for them to do 50 cold outreaches to customers, so they skip this step before starting to build the product.
They realize how much of a tragedy this negligence means when the product is rejected and frustration sets in.
By that time, it may be too late to incorporate any feedback because the product is in its finished stage, leading to wasted effort and time.
According to a survey by Skynova in which 500 founders were interviewed, 58% of the founders said they would have done more market research prior to launching. (CNBC)
Dropbox is a prime example of a startup that found its product-market fit by offering a simple solution to a widespread problem.
At its inception in 2007, it provided a cloud-based storage solution that simplified file syncing and sharing, thereby addressing the growing need for convenient and secure file access across multiple devices which lead to a widespread adoption of the product.
No matter how amazing an idea, a perfect product for the market, or your five-star service is, the business will still fail if no one knows about it.
Your clients can only find you in a sea of competitors if you have a robust marketing plan in place.
If a business does not have a compelling enough value proposition or event to cause the buyer to actually commit to purchasing, invested resources will be tied down and growth will stagnate.
Poorly executed campaigns and a lack of understanding when it comes to digital marketing can also lead to wasted resources and missed opportunities.
Statistics from Exploding Topics show that 22% of startups fail due to a lack of a sound marketing strategy.
Good sales reps will tell you that to get an order in today’s competitive market, you have to find buyers who have their “hair on fire”, or are “in extreme pain”.
You also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have).
Most successful startups discover and adopt these marketing strategies depending on which is more relevant to their market:
While you don’t necessarily need a professional PR team at the beginning, ensure you have a strong presence on the right social media channels and utilize them to their fullest potential.
Finally, track your performance and analyze results to determine which strategies are working and which need improvement.
Whether it's a shift in consumer preference or a black swan event like the coronavirus pandemic, startups must adapt quickly.
According to a report by Statista, lack of financing is behind a whooping 47% of startup failures.
Economic uncertainties like high interest rates, inflation, recession fears, and a 63% plunge in North American startup investments have all strongly impacted the current capital crunch. (CNBC)
For most startups, angel investors and venture capitalists provide the necessary capital until their product or service begins to generate income.
Nevertheless, if a startup fails to find new capital before the original capital runs out, it can mean serious trouble.
Bodega, for instance, was a startup that operated a network of automated convenience stores. The company raised $32 million in venture capital and took out $5 million in loans to finance its expansion. (FasterCapital)
However, it ran into trouble when it failed to generate enough revenue to support its growth and make its debt payments.
The company was unable to find additional funding and was forced to shut down in 2020. (Tech Crunch)
Salorix, a U.S based agency that offered an online networking engagement platform for brands was considered to have a cutting-edge product and even received twice acquisition offers from Google in 2012 and 2013. (Failory)
Sadly, it closed down in 2014 because of its inability to raise money after its investors stopped supporting it.
Cash flow problems can also result from a failure to meet customers' needs or problematic pricing (too low or too high), resulting in too little money to keep the business afloat.
If you have started a company and things aren't working out, and you have little capital and a struggling business, taking another loan just might be a bad idea.
However, in some cases, failure is avoidable even when there’s a tough funding environment, but only if founders keep track of their finances and ensure that money is coming in faster than it's being spent.
Striking a delicate balance between financial planning and funding availability is a key success strategy for a startup.
Having a great team of talented people working for your startup won't matter much if the leadership is weak, ineffective or bureaucratic.
If a leader fails to motivate their team and create an environment that fosters growth (both professionally and personally), it can lead to stagnation, low morale, and a lack of innovation.
According to a study, 47% of respondents thought that when leaders lack leadership skills, they end up damaging the business. (Community Bug)
In addition, if startup co-founders don't work well together or often have incompatibilities, it can lead to conflict and a less-than-ideal workplace.
Sahlman found that 65% of high-potential startups fail as a result of co-founder conflict: relationships, roles and decision-making, and splitting the income. (Forbes)
A startup team should not ignore the business process of relationship, teamwork, and open-mindedness as it can eventually deprive them of making headway.
According to Entrepreneur, 23% of startups post post-mortem reports referenced team issues as an ingredient in their failure.
A startup can’t segment its responsibilities. Where the CEO thinks, “It’s my job to lead”, the CMO thinks, “It’s my job to market” and the lead developer thinks, “It’s my job to code.”
Things are far more organic in a startup, meaning that roles and responsibilities will overlap. Small things can turn into large things.
Some of the most important components of a startup are those pesky issues of business process, business model, and scalability.
Successful entrepreneurs understand that they must work on their business, not in their business.
Getting caught up in the administrative web of presentations, phone calls, meetings, and emails can distract the entrepreneur from the heart of the business.
For instance, Powa was once hailed as Britain’s brightest tech start-up, the mobile e-commerce company that helped put London on the unicorn map.
However, in 2016, the company fell into administrative Waterloo after the founder, Dan Wagner, bragged about a deal it made with China’s UnionPay, giving them access to over 1.3 billion customers and trumping Apple Pay. (Sramanamitra)
The CEO of UnionPay immediately issued a cease and desist letter to Powa and pulled the deal, resulting in the demise of the company.
Growth — fast growth — is what entrepreneurs crave, investors need, and markets want. Rapid growth is the sign of a great idea in a hot market.
Growth leads to more growth, which leads to even more growth.
A startup should not be satisfied with marginal single-digit growth rates after many months of operating. If the growth doesn’t happen after a certain amount of time, then the growth will not happen.
You can be solving the most soul-wrenching problem, but if it only helps 10 people or if you’re waiting 3 years to launch your MVP, it surely won’t get you there.
Total addressable market (TAM) and execution sometimes matter more than the idea itself.
A successful example of a startup that had accelerated growth is Deel, a global HR and payroll company.
Founded in 2019, Deel's technology helps companies simplify every aspect of managing an international workforce, from culture and onboarding to local payroll and compliance. Fast forward to 2024, Deel has over 40,000 customers and native payroll engines in 50+ countries. They grew from $1 million in annual recurring revenue (ARR) to $100 million in 20 months. (Command)
A company that is not growing is shrinking.
The second major reason why startups fail is that they “run out of cash.” Why did they run out of cash? Because they didn’t grow fast enough.
If your startup can grow fast, you can effectively bypass some of the biggest startup killers; losing to the competition, losing customers, losing personnel, and losing passion.
Rapid growth is enough motivation for a team and the green light for investors, as it’s a sure sign of future success.
Considering that $66.5 billion was pumped into startups in Q3 of 2024 worldwide, it seems crazy that we’re allowing up to 90% of that to go down the drain. (Crunchbase News)
Launching a startup from the ground up is both challenging and exciting. However, understanding and avoiding the pitfalls can accelerate chances of success to a remarkable extent.
A great idea developed and modified into a great product that meets an existing societal need, alongside a robust and dynamic marketing strategy by a cohesive and flexible team will most likely attract investment and achieve accelerated growth.
