Top-5 Reasons Why Startups Fail and How to Avoid Them

The stats are indeed striking, 90% of all startups are doomed to fail and 20% of them don’t make it to the 2nd year. However, don’t let the numbers scare you – make them work for you instead. To name the main reason for startups to fail, let’s go deeper into the subject. The article below analyzes the issue from every possible angle.

The CB Insights marketing analytics platform singled out top-5 reasons behind startup failures. Even though their pros have studied failed startups and reasons behind the phenomenon since 2018, the list of the above reasons keeps growing still.

In the article below, we will throw some light on the 5 reasons for startups to fail and illustrate them with real-life examples. NB: with the right strategy at hand, they can be predicted and avoided:

1. product/market mismatch
2. wrong team
3. poor marketing planning
4. wrong startup launch time
5. unbalanced competition.

Mind that it is not those entrepreneurs who never failed that ultimately achieve success with their startups but sooner those who never gave up even though they failed more than once.

1. Main reason why startups fail – product/market mismatch

Issue: according to CB Insights, 35% of startups fail since they attempt to launch products that markets do not need. Blinded by their ideas, entrepreneurs are lured into thinking they are ahead of time. Even if so, the market may be not ready to accept innovative startup products or target audience may feel no need for them. On certain occasions, the supply may far exceed the demand. With existing products and services keeping up with customers’ needs, new ones have no chance to get a foothold in the market.

Startup failure – example: the Vreal online platform was about to create a VR space for video game streamers to communicate with the audience. The VR market however failed to keep pace with the expectations the platform founders had.

Fixing the mistakes: with a thorough in-depth market and competition research, startup founders will learn the number of market players, realize the market volume, and see what the high-demand and low-supply niches are. To analyze the target audience, a customer study may come handy, while high-quality studies like 1:1 interviews are useful for improving the product and increasing its value for the target audience.

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2. Reason why startups fail – wrong team

Issue: 14% of all startup failures result from recruiting unskilled teams. Business founders may lack sufficient experience (i.e., expertise) in their startup industries. Startups may experience difficulties with both HR and process management as well as technical implementation of ideas. Lack of trust in the team is also a bad sign for new businesses and startups.

Startup failure – example: with the Quincy startup launched to make clothes for e-commerce purposes, one of the reasons behind the startup failure was that none of its founders had any previous experience with clothes manufacturing. This resulted in operational issues and wrong people having been hired.

Fixing the mistakes: solutions shall stem from the issues. Talented jewelry designers with no effective selling skills should partner with persons boasting the required skills that they are missing. Networking is seen as an excellent option to work together. If you feel like you could use better marketing or HR management for your business, you should hire industry experts to avoid startup failures. Delegating tasks that you are not good at to more experienced partners or colleagues is a wise strategy, as is maximum transparency that promotes effective communication within the team and eliminates potential trust issues.

3. Reason why startups fail – poor marketing planning

Issue: this reason for startups to fail comes with 2 opposite sides. Believing that high-quality goods tend to sell themselves, certain companies underestimate the value of marketing. Under the impression that wider coverage yields better results, other startups may try to use way too many marketing channels. Instead of building purposeful in-depth ties with their audience spanning several channels, they scatter resources unwisely.

Startup failure – example: the Habitual app developed to track user habits has failed as the startup launch had no reliable marketing strategy behind it.

“It turns out many software developers tend to think that high-quality products distribute themselves. After the launch at Product Hunt, I didn’t come up with a smart marketing strategy, and the app never took off”, – Holger Sindbaek, the Habitual founder, declared.

Fixing the mistakes: even if the startup product or service is truly innovative, it is doomed to sink without a proper advertising campaign. Marketing is a useful tool to gain an audience, including potential users and customers. 

With special marketing apps, you can build a successful marketing strategy for your service or product. Start with selecting 20 potential marketing channels like SEO, SMM, e-marketing, PR, community building, etc. Expand the scale by selecting 3 to 5 instruments that would work best for your business. Having tested the marketing strategy for 3 to 6 months, amend it accordingly for your company to reap top benefits therefrom. Using 2 channels only may be more than enough for your company and you won’t need to waste your time and money on anything else.

4. Reason why startups fail – wrong startup launch time

Issue: when launching a startup, a new product or an innovative service, time is of the essence. Launched too early, the startup will send a wrong message as to the product quality to the customers who will hardly remain loyal. If startup founders wait too long, competitors may fill the vacant niche with a similar idea. As if it were not enough, certain factors like the recent pandemic are unpredictable. Obviously, startups like new tourist agencies or restaurants are doomed to fail if launched in troubled times.

Startup failure – example: inglorious demise of the HubHaus startup early on in the COVID-19 pandemic. The startup was supposed to become a long-term rental project for urban working professionals. 

Fixing the mistakes: flexibility should be an integral part of each business plan. Where the circumstances call for it, entrepreneurs and business people should be prepared to change their plans. Use the “if… then…” method to develop backup plans. A backup plan for a restaurant would be having a delivery service in place if a new pandemic breaks forth.

5. Reason why startups fail – unbalanced competition

Issue: bigger companies offering the same product or service or new enterprises that come with the same idea as you do may exist. With any of the above examples, competition may result in a startup failure. Remember that keeping the balance is the key. Lack of competition may potentially mean the market does not need your product or service. On the flip side, when faced with overwhelming competition, the startup may be ousted from the market by competitors boasting better understanding of the industry and bigger resources.

Startup failure – example: the Mac & Mia delivery service delivering children’s wear failed to compete with larger companies in their sector.

Mac & Mia faced massive competition within the industry, including, inter alia, the Stitch Fix company. Having launched its kids wear delivery service in 2018. Stitch Fix became a listed company in 2017, with market capitalization of approximately USD 2,700,000,000. At least 20 other upstarts launched analogous delivery services for children’s wear, and failed as well.

Fixing the mistakes: you should study the competition anew. Before launching a startup, take time to shape an understanding of your market. This is the only way to realize how competitive it is. For starters, make a list of major market players and gather information about them. Subscribe to their email newsletters, try to place an order with them, and download their app, if any. While doing it, you’ll spot the bugs that can be fixed and things that can be improved. Eventually, you may even come up with an idea for a new startup niche.

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Startup failures worldwide – stats

• As of now, over 90% of all new startups fail.
• As many as 10% of startups do not make it to the 2nd year.
• With budding startup founders, around 18% of startups succeed.
• On average, it costs USD 3000 to launch a startup.
• Salaries are among the largest expenditure items in business.
• 34% of small enterprises that failed as startups did so because of the product/market mismatch.
• 22% of failed startups had no solid marketing strategy.
• Average VC firms receive over 1000 offers per annum.
• Approximately 30% of venture-supported startups fail.
• As for fintech startups, around 75% of them fail within 20 years since the launch date.
• In the US, hi-tech startups face the highest failure rate.

How many startups fail during their first year?

Approximately 10% of startups fail in their first year. According to the US Bureau of Labor Statistics,  the number of failed startups grows as time passes, with the biggest share of them failing before they reach a 10-year mark.

Long-term, approximately 90% of all startups fail, meaning only 1 in 10 traditional startups will survive. For most industries, the failure rate has stayed more or less the same since the 1990s.

The stats as to startup failures and reasons therefor may be useful for startup owners to efficiently manage risks and secure business success for their startups.

For valuable info and key stats as to startup failure rates, please refer to the industry data below:

• 20% of all startups fail within the first two years
• 45% of newly-launched startups never reach a 5-year mark
• 65% of startups fail within the first 10 years
• 75% of US startups fail within the first 15 years.

Successful startups – stats

Long-term, success rate for startups varies from 10% to 20%. Yet, we should mention that in case of startups, success potential is a multi-factor phenomenon.

According to Small Business Trends, most founders of successful startups claim they are qualified and experienced enough to manage their businesses.

The other factor promoting long-term business success is the owners’ ability to meet the demands of potential customers and make high-quality risk management a part of their small business management environment.

Below, you will find important stats as to small business success rates.

Key stats

• With first-time small business owners, the success rate reaches 18%.
• Success rate with business owners that failed with their startups before is a bit higher and makes 20%
• Those business owners who enjoyed success with their startups before, boast a 30% success rate with their new startups.

Startup failures are an integral part of a business life and they are better to learn from than any university degree. This is further confirmed by the fact that 67% of failed startup owners come up with new startup ideas later on.

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