Top 12 Reasons Why Startups Fail

Most startups don’t make it. This is something that founders wouldn’t want to hear. But understanding why startups fail frequently can help entrepreneurs avoid those costly mistakes.

In the startup world, we usually hear of mega successes. Stories of multi-billion-dollar IPOs and unicorns that exponentially increase their valuation with investors queueing up at their doors. But that doesn’t convey the whole picture.

A significant proportion of startups don’t succeed. Even with the best of intentions, things may not work out at times. That’s the reason ‘why startups fail’ should be of interest to all entrepreneurs and small businesses.

What’s interesting about startup failures is that they’re not limited to any particular class. While some sectors do come with higher risk and extreme competition, startups across the board usually run into the same set of problems. From the highly popular to the extremely niche, most startups are at a high risk of failure.

But how big is the problem? To understand why startups fail, let’s first look at the statistics.

The failure rate of startups

• 90 percent was the failure rate for startups in 2019
• Close to 21.5 percent of startups fail in the first year
• By the second year, that figure rises to 30 percent
• Half of all startups close down by the fifth year
• By the tenth year, 70 percent of all startups fail

What these statistics show is that, contrary to popular belief, startups can fail even after several years of being in business. That’s why it’s important for entrepreneurs and investors to understand why startups fail. To make it easy for you and your venture, here are the 12 most common reasons that force startups to shut down their operations.

12 reasons why startups fail

Extraordinarily long hours can seem a vital part of startup culture, especially in the initial days. Working way too hard can come across as the industry norm. But this can quickly lead to burnout, which can bring down the startup.

Work-life balance is crucial to not just productivity and peace of mind of the individuals but also the success of the enterprise. Burning both ends of the candle will lead to fatigue, disturb the team structure, and put unnecessary pressure on employees.

Studies have shown that entrepreneurs are twice as likely to suffer from mental health problems like depression. This can affect the performance and decision-making capability of the leaders and their teams. What started off as a passion project can slowly create a toxic culture doomed to fail.

When done well at the right time, pivots can be exceptionally successful. Instagram, YouTube, and Groupon are excellent examples of successful pivots. But for a pivot to work, there should be a product or service with a market fit and a growing customer base without much competition.

When pivots are strategically carried out after careful consideration, there will be greater chances of success. In the case of startups that fail, pivots are undertaken as a last-ditch effort. When ventures are forced to pivot, more often than not, they end up failing at it.

The law firm startup Atrium had to shut down after unsuccessfully trying to pivot into a legal tech software firm. Inboard ‘s pivot from electric skateboards to e-scooters bankrupted the company.

3. Discord among team members or with investors

For any enterprise to be successful, the founding team has to work like a well-oiled machine. If there is bad blood between the founders, there will be serious problems. Remember that the decisions in the early stages have a disproportionate effect on the fortunes of a company.

Disharmony among team members will send the wrong signals to the outside world, including, investors, media, and customers. One of the reasons for the failure of the social content startup BricaBox was a co-founder walking out of the startup. At times, the discord can be between the founders and the investors, as in the case of Pellion Technologies and Khosla Ventures which led to the startup’s shutdown.

This is a fairly straightforward reason why startups fail. After making outlandish promises to both investors and consumers, the startup’s product may turn out to be inferior. A flawed product can sink even the most popular of companies even if they are backed by hundreds of millions of dollars in venture capital funding.

Even after raising more than $50 million, Doppler Labs couldn’t deliver the right product. The speaker and microphone they released couldn’t compete with Apple AirPods. In some cases, the final product could be expensive and without any viable product-market fit. Juicero ‘s $400 cold-pressed juicers turned out to be obsolete and irrelevant.

Timing is of the utmost importance in the startup world. Some of the biggest names in technology not only had great products but were also fortunate to have launched at the right time. Conversely, even a great product can’t save a firm if it’s launched at the wrong time. Unfortunately, the effect of timing only becomes clearer in hindsight.

If the product is launched too early, there may not be a market for it. Moreover, users may not warm up to it even if there’s a relaunch. If the launch is delayed, startups might miss that crucial window of opportunity. The cancer diagnostic startup, On-Q-ity, had to shut down operations primarily because of bad timing.

Not having the right members in the team can lead to startup failures. Among all the reasons for startups shutting down their operations, this is one thing that can be effectively solved in the early stages. But far too often, founders are reluctant to let go of responsibilities because they believe that they can manage everything.

Without team members with complementary skillsets, there will be poor resource allocation and subpar performance. After the database product startup Fieldbook shut down, one of the reasons cited was the absence of qualified and experienced team members. The construction tech startup, Katerra, didn’t have experts in its team, which was a crucial factor in the company’s collapse.

Even the best of products cannot save a startup if it gets its pricing wrong. Admittedly, getting the price right is easier said than done. If a company is the first mover in an industry or creates a whole new category, it would be difficult to find viable pricing models. This also means that consumers won’t be used to either paying for that product or paying the right amount for it.

If there is a significant input cost, companies will be forced to demand higher pricing which may not succeed in the market. Customized health coaching startup Arivale learned this the hard way. Consumers found its $3,500 per year pricing to be way too high. That was a key factor in the company going out of business.

8. Regulatory or legal challenges

In some cases, there would be nothing wrong with the product or its pricing but there could be legal and regulatory complexities to deal with. If it’s a new product creating a new category or combining various categories, the startup could invite unwanted attention from the authorities.

The Bitcoin lender BTCJam ran into regulatory challenges before it had to shut down. BitLendingClub, a similar service had to face a similar fate. Security token startup Neufund also faced complex regulatory problems that forced it to wind up its operations. As these examples demonstrate, legal challenges are usually seen in new sectors where regulators may not have framed the necessary laws.

9. Unviable business model

For any business to be successful, it would need a sound business model. At the outset, the founders should know where they expect their revenue to come from and how much they would be spending on customer acquisition and overheads. The business model will also reveal the pricing the leadership has in mind and the company’s growth trajectory.

The hospitality startup Stay Alfred’s business model was one of the main reasons why the company had to close its doors. For Stockwell, the AI-powered vending machine startup, the initial business model couldn’t cope with the challenges of the pandemic. The micro-credit startup Puddle also had to cease its operations due to an unviable business model.

Entrepreneurs may undermine their competitors or underplay the chances of more players entering the system. While they may have absolute belief in their product, they may not have a realistic assessment of the competition and their capabilities. In several instances, startups will be shocked to find out how legacy companies with existing customers can start offering the same product that they would have launched.

The B2B food delivery service Zoomer couldn’t compete with the bigwigs in the market including GrubHub and UberEats. Chef Nightly had to shut down due to the same reasons. The video platform Vidme realized that Google and Facebook could easily outcompete them. The comics startup Madefire also failed because of intense competition.

Delivering a product without any consumer demand is one of the biggest reasons why startups fail. When founders get too focused on their idea without conducting thorough market research, they will learn that marketing won’t be able to generate sufficient demand. This can happen even if the startup is backed by the biggest names in the business.

Quibi, the short-form video streaming app, had a whopping $1.8 billion in funding. The founders Jeffrey Katzenberg and the startup’s CEO Meg Whitman are two of the leading names in the industry. But all it took was a year for the company to shut down because there was no market need for the product.

12. Running out of funds and failure to raise capital

Ask any entrepreneur who had to shut down their startup and in all likelihood, their primary reason would be that the firm ran out of cash. This happens when revenue doesn’t start coming in as planned and overheads keep increasing. In most instances, the leadership won’t be able to cut down marketing and vendor costs.

When the startup cannot meet its targets, both existing and potential investors would be wary of providing additional funds. This failure to raise capital will seal the fate of the startup. Aerion, the supersonic business jet startup, couldn’t raise funds and had to shut down its operations. Housing startup HomeShare also had to close its doors due to a lack of funds.

In short

Learning from the mistakes of others is an effective strategy in business. Sometimes it could be a combination of any of these 12 reasons why startups fail that lead to startup failures. Understanding why startups fail can help both entrepreneurs and investors build better businesses.

Originally published at https://forevermogul.com on May 9, 2022.