Why do Startups Fail?

It is a sobering fact that recent research indicates a high failure rate for startups, with
approximately 90% of them ultimately failing over the course of several years. The failure
rates are significant at various stages:

1. In the first year, around 21.5% of startups fail.

2. By the second year, the failure rate increases to 30%.
3. By the fifth year, half of the startups have failed.
4. Finally, by the tenth year, approximately 70% of startups have folded.

Interestingly, these failure rates do not discriminate based on the prominence of the startup.
Whether it is a well-known company like WeWork or MoviePass or a relatively unknown
venture targeting a niche market, startups, in general, face a higher likelihood of closure.

However, amidst this discouraging trend, there is a silver lining. We have gained valuable
insights into the reasons behind these startup failures, offering valuable lessons for aspiring
entrepreneurs and the business community as a whole. By studying these failures, we can
better understand the following factors that contribute to startup failures:

1. Lack of Market Understanding:

A common reason for startup failures is the failure to accurately understand and gauge the
market. Many entrepreneurs enter the startup realm with excitement about their new ideas
and ambitious visions of achieving rapid success, often without a thorough understanding of
the market's actual need for their product or service. Driving meaningful innovation requires
a comprehensive grasp of existing offerings and customer demands. While founders may
assume that everyone will want their latest invention and secure venture capital, they often
realize later that the projected profits are unattainable. The market is a complex entity, and
accurately predicting success or failure can be challenging. Although models and tools
provide insights into entrepreneurial potential, sometimes the true outcome can only be
determined by launching the product and observing its reception in the market.

2. Shifting Market Conditions:

Another significant factor contributing to startup failures is the impact of changing market
conditions. While some startups may initially have an accurate view of the market,
unforeseen shifts can occur before they establish themselves sufficiently to adapt to these
changes. The COVID-19 pandemic serves as a prime example of such market disruptions,
leading to the struggles and failures of many businesses. Mandatory shutdowns and
capacity restrictions caused significant drops in customer volume for retail and restaurant
businesses, and it took months for customers to regain confidence. For startups in their early
stages, lacking substantial profits or an established customer base, these sudden market
changes proved insurmountable, resulting in a series of setbacks and false starts. Currently,
small businesses are grappling with labor shortages, forcing them to reduce hours or
operate with fewer team members. These ongoing challenges may lead to enduring patterns
of failure, particularly for brands that were already facing difficulties prior to the pandemic.

3. Inadequate Market Timing:

Sometimes, a startup may have a brilliant idea but fails to time a crucial product launch or
marketing campaign effectively. Unfortunately, a poorly timed move can lead to failure if
investors perceive it as a sign of poor decision-making and decide to withdraw their support.
Certain ideas have been ahead of their time, like Ask Jeeves or WebVan, which offered
valuable services but struggled due to a lack of demand or being perceived as too
unconventional in a market that wasn't ready for such innovations. In other cases, marketing
campaigns launched after relevant holidays or major product launches without prior buzz
can result in poor timing and hinder the startup's success.

4. Cash Flow Challenges:

Running out of funds is a significant factor contributing to startup failures. Most startups rely
on investors and venture capitalists to provide financial support until their product or service
becomes profitable. If the startup fails to generate sufficient revenue within a reasonable
timeframe, investors may hesitate to continue funding the venture. If the startup does not
actively seek alternative sources of capital as its initial funds deplete, it will struggle to cover
operational expenses based on the envisioned business model. Cash flow issues are
prevalent among startups and rank among the top reasons for their closure. Even if investors
do not withdraw support, businesses can fail if they fail to meet customer needs or set their
pricing too high or too low.

5. Deficient Business Plan:

Having a business plan is a fundamental step for startups, but merely having one does not
guarantee its effectiveness. Flawed business plans fail to consider critical factors that later
become significant, leading to business failure instead of success. Common flaws include
vagueness, miscalculating costs, underestimating production or marketing timelines, and
inaccuracies in market research. While a formal business education is not necessary,
seeking assistance from experienced individuals can help identify and rectify flaws in the
plan at an early stage.

6. Inadequate Recruitment Practices:

Successful startups rely on hiring the right people for their venture. While certain qualities
like interpersonal skills, perseverance, and problem-solving abilities are universally
important, specialized skills may be required for specific positions to achieve startup
success. A strong team often plays a crucial role in a startup's achievements, as individuals
with diverse backgrounds and innovative ideas can find optimal solutions. Conversely, hiring
employees with significant flaws can have a negative impact on the organization and
contribute to its failure.

7. Weak Foundational Partnership:

When co-founders of a startup do not work well together, achieving success becomes
challenging or even impossible. Poor communication is a common problem in partnerships
lacking a shared vision and values. While partners do not have to be identical, it is crucial for
them to be aligned and have shared goals for the company. Over time, misaligned interests
and goals may lead to conflicts, putting the startup at risk of failure unless leadership can
find a common path forward.

8. Failure to Learn from Mistakes and Make Adjustments:

Mistakes and failures are inevitable in any startup journey. Failure to learn from these
experiences and make necessary adjustments is a significant reason for startup failure.
Persistence is essential, but it must be coupled with a willingness to adapt and improve the
business model. Simply persisting without making necessary changes can lead a startup to
persistently move toward failure. A sound business model and making the right decisions
along the way are vital for persistence to yield success.
 9. Burnout or Loss of Passion:

Startup founders often face challenges with maintaining their passion for the venture. Some
founders may become fatigued or lose interest in their idea before it reaches its full potential,
seeking the next exciting idea instead. When leadership loses passion or experiences
burnout prematurely, the startup is likely to fail. In some cases, founders may choose to sell
the startup to someone who can take the idea forward or incorporate it into their own
concept. However, the loss of passion or burnout often leads to failure, as many founders
rarely regain their original enthusiasm.

10. Unforeseen Market Crisis:

Black Swan Event: While market changes can impact startups, unforeseen market crises,
also known as black swan events, pose unique challenges. The COVID-19 pandemic serves
as a prime example of such an event, causing widespread devastation to small businesses
and startups. While no business could have fully prepared for a global shutdown, some
startups managed to survive or even thrive by leveraging technology infrastructure for
remote operations and communication. Black swan events are unpredictable and can have a
severe impact on startups, but those with agile strategies and adaptable capabilities may
navigate through the crisis successfully.