Startup failure: main reasons and how to avoid it
Table of Contents
Startup failure: overview
In this article we analyse Startup failure to understand the most common reasons and to suggest how to avoid it, referring to the study published by CB Insights.
In fact, in 2021 CB Insights conducted an analysis on the reasons that can lead to startup failure, examining more than 110 startup post-mortems. According to their study, there are 12 main reasons for a startup failure. Let’s see in detail each reason and, above all, how to avoid failure.
The first reason of startup failure: run out of cash/failed to raise new capital (38%)
The exhaustion of funds – linked to the inability to guarantee financing by investors – was the main reason of startup failure for the sample analysed.
However, we should look further and understand why the investors did not believe in the project and did not want to invest. Very often, behind this motivation, there are other related causes; for example, a poorly credible team that doesn’t make the investor feel confident, or even an inadequate documentation (Pitch, Business Plan, Financial Plan or other).
Therefore, you should first try to present yourselves in the best possible way in front of the investors and speak their language.
To prepare all the documentation adequately, we recommend conducting a structured validation process, but also to seek help from external consultants for the areas in which the team has gaps, while also trying to build a winning team.
The exhaustion of funds can also be attributed to other causes related to the inability to manage cashflow, so we always recommend trying to acquire at least basic skills in the economic and financial area or seek help from experts.
Finally, it is very important to underline that fundraising is not an easy process to manage and that one of the variables to keep in mind is time, as you probably don’t want to find an investor when it is already too late. Speed up your fundraising!
The second cause of startup failure: no market need (35%)
No market need represents the second reason of startup failure with a percentage of 35% of the cases analysed.
In this regard, we advise all aspiring startup founders to undertake a structured validation process before founding their own startup and discovering that it has no market.
We recommend reading the following articles published on our blog that guide the aspiring startup founders to validate their business idea step by step: Validation of the problem: the client-problem couple and Validation of the solution and construction of the MVP
The third cause of startup failure: got outcompeted (20%)
Once a business idea is validated, others can seek to capitalize on the opportunity. Ignoring the competition is the third cause of startup failure.
20% of startup post-mortems attribute failure to the presence or arrival of competitors with whom they were unable to compete. If you want to avoid failure, it may be useful to carry out an accurate and exhaustive analysis of the market and competitors.
If you want to deepen this topic, do not miss our article: Market and competitors’ analysis for market validation
Among the various topics that we have covered in the article there are also some tools that we suggest facing this analysis in the best possible way. Here they are:
- Study of the growth ecosystems
- Analysis of the growth horizons
- Graphis representation of the market
- Analysis of the five Porter forces
- The Benchmarking Table
- The Cartesian Graph
- The Value Proposition Canvas
Flawed business model (19%)
Most of the failed startups expressed not having found the most suitable business model as a criticality and reason for the failure.
It is necessary to find a sustainable and scalable business model.
Various tools, such as the Business Model Canvas and the Lean Model Canvas, can be used to build a business model. These tools are used to experiment and understand which the most effective and efficient Business Model is to adopt.
If you want to learn more about the reasons why business models can fail, watch this video!
Regulatory/legal challenges (18%)
Sometimes a startup can evolve so rapidly that it suddenly enters a world of legal complexities that can ultimately lead to failure.
Startups should plan for regulatory challenges from the beginning, preparing in advance for regulatory changes that may occur. Rapid growth can trigger the need to comply with complex regulations, but smaller companies often fail to get prepared for these challenges, unless they rely on the right experts to help them in the process.
Only a few startups create detailed regulatory compliance plans for years to come. The problem, however, is that this can lead to the company being caught off guard.
With a forward-thinking culture of compliance firmly in place, the company can grow in its regulatory responsibilities while mitigating its own risks. Rather than having to remedy afterwards, why not giving regulations the consideration they deserve from the beginning?
Pricing/cost issues (15%)
Defining the right price is very difficult. A price that is too low, for example, can be harmful to cover the costs of the startup and make it profitable, but on the other hand, a price that is too high can put you at a disadvantage if compared to competitors’ prices of and lose the chance to win over them.
The wrong choice could therefore lead to a startup failure. For this reason, we advise you to make a careful analysis of the competitors and their products to position yourself adequately and, at the same time, to verify the sustainability of your business, ensuring at least the coverage of all your costs, but don’t forget to finally test the price of your product by doing A / B tests.
Not the right team (14%)
A diverse team with different skill sets is usually mentioned as critical to the success of a startup. A good percentage of startup failure is due to an unsuitable or weak team. So, having a team with the right skills and spirit is essential for a startup.
On our blog, you can find an article with the guidelines on how to build a winning team: Team and startup success: how to build it
Among the topics covered and explored in the article you will find:
- Soft skills, Hard skills, and Skills complementarity
- Motivation, Mission, Vision and Values
- Team Governance
- KPIs and monitoring of results
A cohesive team is certainly important, but the skills of each team member are just as important in front of the investors to give the startup the right credibility. Therefore, it is also essential to take care of the personal branding of each team member and, in this regard, you can read more in this article on our blog: Personal Branding for startup founders
Among the topics covered and explored in the article you will find:
- What is personal branding
- Why it is important and how to do it
- Personal Branding in LinkedIn and Social Selling Index
- Not only Linkedin for personal branding
Product mistimed (10%)
Product mistimed is another reason for startup failure.
If you launch the product too early, users may consider it not good enough and making them change idea may be difficult if their first impression is negative. The same can happen if you launch the product too late, as you may miss the opportunity to be the first to enter the market.
So, be careful to evaluate the right time to enter the market and keep in mind the importance of correct and thoughtful planning.
However, it must also be added that the analysis of growth horizons is also important, as it allows you to decide whether you want to improve a mature industry or explore options in emerging areas. The type of innovation to be built will depend on this choice; in fact, you can innovate an existing product / service or create an innovation that is not immediately usable by the market. In this way, you are creating an innovation that expands the market potential, or you can decide to make a disruptive innovation which will therefore represent a longer-term investment. Here too, it is essential to reiterate that the correct and thoughtful planning of the launch of the startup’s product is a critical factor for its success.
Poor product (8%)
Product quality can cause the startup failure.
It can be crucial to develop a Smoke test, a POC, a prototype and finally an MVP, but all this will only allow you to test the product or service for a short time before going to market. Later, you will decide whether to invest in other resources, but when the real product is developed it will be necessary to invest in the right resources to obtain a quality result.
Disharmony among team/investors (7%)
Discordance with a co-founder or investor was a fatal problem for the analysed startup post-mortems.
How to stop the disharmony that kills your startup?
Relational disharmony is very common in startup teams and between them and investors. Unresolved discordances can lead to a slower decision making, frustration, reduced staff effort and performance. The types of issues that can create tension between founders and investors include how capital is used, team member appointments, project progress, changes to products or plans, transparency, willingness to follow advice, etc.
There are many tools and techniques that can be used to mitigate the risk of rising tensions and conflicts that are difficult to solve:
- Formal documents: shareholders’ agreements, co-founders’ agreements, underwriting agreements, operational agreements, and founders’ votes
- Operational documents: Business Plan and Financial Plan, with detailed definition of the roadmap and budgeted KPIs
- External people: boards of directors, mentors, mediators, and consultants
- Governance: Processes and detailed procedures
They represent just a few of the available solutions to both founders and investors to reduce the overall risk of the project, mitigating the risks of disharmony and conflict, and ultimately failure. However, many founders and investors miss the opportunity to use these tools because they feel they are inconvenient to use.
By immediately addressing the possible causes of conflicts and dissatisfactions and so, regulating and disciplining the relationships between co-founders and investors, you can lay the foundations for a successful startup.
Pivot gone bad (6%)
Pivots can work extremely well, or they can lead to startup failure.
The term “pivot” has become a buzzword, as it refers to a significant business change and is intended to help a startup recover from a difficult time, improve, and stay on the market. But are pivots really a solid business strategy or just a desperate attempt to save a failing company?
It is widely recognized that startups should only pivot when needed and with considerable planning and thoughtful execution.
Every startup faces significant difficulties on the road to success, but it is necessary to know the difference between an obstacle and an impossibility. You should know when it’s time to persevere and when it’s time to quit.
Once you have decided on the pivot, you need to consider various factors that lead to a successful pivot. Here are some tips to help you reduce your risks and increase your chances of success:
- If you have assessed the need to pivot, then do it as soon as possible as this helps to avoid wasting time, effort, and money.
- If the path you are following doesn’t feel right, not only you do need to step back and revaluate everything, but you also need to make sure your new vision is the right one, so choose new goals that align with your vision.
- Since pivots do not necessarily require a radical change, it is important to identify which aspects of your business can be recovered, maintained, and reused, once you have decided on the new direction, as not to discard all the work you have already done. Redirect your current resources to your new goal.
- The feedback you can get from customers is a great indicator of whether you should pivot or not. If you constantly get critics, you should be ready to pivot, so listen to your customers and act accordingly.
- Pivoting can be a useful decision for a startup that has encountered an obstacle and cannot go further, but it is equally important to think carefully before embarking on a new direction and evaluating the scenarios that could be set up. To avoid putting yourself in a further difficult situation and running the risk of bankruptcy, then be sure to carefully consider the opportunities for growth and expansion in your new path. If the market is small, the customer base is diverse or has too much competition, it is not worth it, and you should think about additional alternatives, i.e., make sure your pivot offers growth opportunities first.
In conclusion, starting and running a startup is full of risks. Making hasty decisions is a road to disaster, so before you decide to take your business in a new direction and take a pivot, take some time to prepare and plan everything right.
Burned out/lacked passion (5%)
Work-life balance is not something that startup founders can easily manage and therefore the risk of burnout is high.
But what is Burnout?
We can define a burnout as an emotional, mental, and physical exhaustion, which can be caused by excessive and prolonged stress.
Startups attract different types of employees, most of whom are energetic and driven self-starters. However, startups also tend to put more stress on employees than established companies. In fact, since they are small companies but with the same complexities of large ones, they are often understaffed, and employees often take responsibility for multiple activities together. When responsibilities become too big, employees burn out.
What can you do to avoid the risk of burnout?
Actively work to fight this issue with team activities, advancement opportunities, networking, and a true work-life balance. Happy employees make growth possible, so keep your creative self-starters satisfied and, above all, enjoy the journey!
Startup failure: conclusion
Finally, we list the top 12 reasons of startup failure here below:
- Ran out of cash/failed to raise new capital (38%)
- No market need (35%)
- Got outcompeted (20%)
- Flawed business model (19%)
- Regulatory/legal challenges (18%)
- Pricing/cost issues (15%)
- Not the right team (14%)
- Product mistimed (10%)
- Poor product (8%)
- Disharmony among team/investors (7%)
- Pivot gone bad (6%)
- Burned out/lacked passion (5%)
Find out more on Startup School page. You will discover more interesting content and videos to watch!