The reality is that nine out of ten startups fail due to various objective and subjective reasons. Understanding the most common causes of failure can help business owners manage their expectations, considering some risks (though it's impossible to account for all of them).
So, let's look at the top ten most common reasons for startup failure. But not failure from the investors' perspective, for whom failure means anything that doesn't return their invested capital with profit. We will consider the reasons for failure from the founders' standpoint.
Lack of money is not the reason for failure.
An analysis of 111 startups founded in the USA that are no longer in operation, conducted by CBInsights, shows that 'running out of cash and inability to raise new funds' is the most prominent reason cited by ex-startup executives for their closure. However, we propose to consider money not as the cause but mostly as a consequence of failure because money doesn't just vanish from the account - it means they were mismanaged.
So, what can go wrong with your startup?
Do not spend a lot of time and resources until you are sure that people want what you offer. The most common problem is the lack of market demand and customer demand for the services or products being offered.
The simplest thing needed to avoid this problem is in-depth research and analysis, which will help you accurately identify market needs. Let your product become a solution to an existing problem. Otherwise, it will become solely your problem. The most successful startups always know exactly for whom they are creating the product.
For you, as a startup founder, your product may be perfect, but it is much more important for it to be high-quality and ideal for the consumer. If your product does not deliver on its promises and fails to meet customer expectations, they will most likely perceive it as poor and be disappointed in it.
Therefore, a successful startup requires the ability to read trends and adjust the product according to customer demands. Conduct user testing frequently and get feedback from potential customers. The more you understand their desires and pain points, the better your product will be for them. After all, here's the secret: the product must be perfect not for you - but for the consumers.
To learn more about why every design decision should be based on customer needs, read our blog post “What is UX design?” .
Your market entry strategy is one of the crucial parts of your business. No matter how amazing your product is, it won't matter if no one knows about it or how to sell it.
Startup failures can result from poorly developed online advertising or running campaigns on a platform that the target audience doesn't use. So, study your target audience, find out what they want, where you can reach them, and how they respond to information. Also, identify your competitors and seek experts who can professionally assist you in crafting a marketing strategy.
Marketing strategies significantly help businesses increase their profits. If you have a great product, but the company cannot effectively sell it, both the business and the product will fail.
4. Weak Business Model
Creating a business model is not just about developing a business plan. It's about shaping and managing the business. A viable business model should focus on the target customer, company, or market to achieve possible growth and sustain the business in the long run.
However, business founders must prepare themselves for the possibility of changing their business model or even their strategic direction in response to market conditions or demand. This process is known as "pivot." Flexibility and adaptability are the key factors for startup success, and conversely, the lack of such elements often leads to failure. The ability and willingness to let go of a business model or even an entire product, even if it's working well, in exchange for another that can grow faster allows good founders to become great.
If you price your product too high, you'll lose potential customers. If you set the price too low, you won't generate enough profit to sustain your business.
Finding the right balance between a price that covers your costs and the one that attracts customers can be challenging. To achieve this, you need to choose the right pricing model - you can learn more about it in our blog.
Forget what you've heard about ignoring the competition. Every successful business owner studies and understands their competitors, who can emerge at any time. It could be a new entrant with a better product or service, a recognized player entering your market, or another startup performing better than you.
If you are not ready to deal with competitors - sometimes outsmarting them and other times collaborating with them - then you are not prepared for market competition.
Professional burnout is not just some psychological term; it is a highly threatening condition that, if ignored, can destroy everything.
As Sifted reports, "87% of startup employees said that working in a startup negatively impacted their mental health... and 84% experienced exhaustion." This issue is currently among the most significant problems faced by startups.
Stagnation in growth, lack of personal interest from the team, an improper work-life balance, and the absence of positive events in daily work life lead to feelings of exhaustion and futility. As a result, workloads are distributed unevenly, and startup founders find themselves overwhelmed, leading to a decline in enthusiasm and productivity.
Thus, it is crucial to know when your efforts are hitting a dead end, take a pause, reevaluate, redistribute the workload, and redirect efforts in a different direction.
Many new business ideas develop among family members or friends. In such situations, partnership discrepancies may seem unlikely, but they often arise. Excessive trust, hidden ambitions, dissatisfaction, preferences, leniency towards mistakes, verbal agreements and lack of written ones, role duplication, unclear work responsibilities, and undefined hierarchy - all these factors cause many to suffer and walk away from the nightmare created by partnership problems.
Frequently, when such discrepancies arise, there is no established way to get out of the deadlock and move forward. That leads to even more profound problems, one-sided dissatisfaction, and burnout. Plus, it can lead not only to the startup's collapse but to the deterioration of relations between friends or family members.
Create a specific type of agreement and outline terms before working as business partners. This way can reduce potential problems related to the partnership and investments.
You can have an excellent or no partnership at all, and still face leadership problems. Leaders who believe they know everything are a sign of a failing startup. They may be experts in a particular field and even achieve success in that area, but it can create a false sense of confidence that success will follow them wherever they go and whatever they do.
Leaders who have experienced failures in the past often become better leaders. They have learned lessons and gained experience in overcoming crises. Not all leadership styles fit startup culture. An authoritarian style may stifle innovation, while an overly liberal approach may lead to a lack of structure. It is more effective to combine different leadership styles depending on the situation that aligns with the company's culture, development stage, and team specificity.
10.Not the right team
This reason is related to the previous one. About a third of failed startups regret not being able to assemble the right professional team for their ventures. New startups often fail due to poor management, hiring inexperienced employees, and frequent leadership changes.
Successful companies like Apple, Microsoft, and Google are at the top of the business world thanks to their professional employees and team support. Therefore, having a smart and cohesive team is an asset for any business in the long run.
So, when hiring people for your team, you must be highly selective about them. Inquire each potential employee about why they want to work in your company and how they would solve typical problems that may arise in a regular workday. Also, don't forget about necessary skills - hire someone who won't learn on your dime but will provide you with their professional work.
10+1. Lack of social presence
Many startups fail because they focus solely on delivering their product or service to the market without considering the need for an online presence.
The best way to build your customer base and attract attention to your audience is by creating a strong online presence, which requires appropriate and effective marketing skills.
10+2. Lack of Focus
Frequently, startups have a vision of a grand platform with amazing capabilities and features that address several problems at once. However, as a startup, you often do not have the resources to create such a complex product. Moreover, does the market really need it?
A startup should focus on what it can do best and invest capital only in its core product development. Then both: human and financial resources are concentrated and work towards a single goal. That is crucial for achieving success and expanding the startup's operations while accumulating capital for further growth.
We have provided these warnings not to make you doubt your abilities but to help you save time and money and avoid mistakes made by others. Learning from others' mistakes is much more advantageous than learning from your own.
Successful entrepreneurs are not born; they become successful. And now, armed with this knowledge of what to avoid, go ahead! The path to a successful startup is now much closer to you.