Are those unicorn startups genuinely magical? Or are they doing something vastly different to the competition?
Sadly, there isn’t a single, simple reason why startups fail. However, we can learn from the patterns provided by those unsuccessful attempts and their generously provided project post-mortems. From their analyses, we get a clearer picture of the differences between those whose doors close far too soon and those that scale and thrive.
If you Google why startups fail, there are plenty of ‘listicles’ outlining the most common reasons CEOs, founders, and investors blame for their organization’s demise. But we’re here to simplify matters-drastically-to pinpoint the most likely causes.
90% of startups fail – here’s why
There are plenty of pages and research documents gathering data about startups failures, and everyone’s got an opinion and a theory. In the interest of our discussion, we’ve taken a few statistics from a trusted source, CB Insights.
CB Insights is a tech market intelligence platform that analyzes millions of data points on venture capital, startups, patents, and partnerships.
Last year, they released data from over 110 failed startups after deep-diving their post-mortems. The top two reasons have been interchangeable across surveys and seasons for years.
- Ran out of cash/failed to raise new capital
- No market need
With those top two golden nuggets, we decided that we could divide typical startup failures into two categories.
- A poor or implausible product or idea hyped and delivered by overly enthused founders
- A good idea with saleable values, poorly managed, manufactured, or distributed
Category 1 offers the biggest and most apparent facepalm. Yet, the majority of those failures could have sidestepped disaster at the very first hurdle. Category 2, however, isn’t quite as straightforward.
The ticket to success for Category 1 boils down to human behaviour, self-awareness, and the ability to sort the facts from the fiction (and when we say fiction, we’re referring to over-enthusiasm, blind-sidedness, and too much faith-of-self).
The ticket for success in Category 2 demands a little more by way of ability.
So let’s jump in and understand why so many startups could have avoided an early bath if they’d simply taken the time to listen.
Category 1: Nobody needs what you’re selling
It’s as simple as that.
Sadly, too many entrepreneurs get hooked on the idea of success and running their own organization that they fail to stop and check if their product is viable. It could be that the product doesn’t actually deliver anything the customer needs, or it’s down to timing and pure bad luck. Either way, if nobody’s buying, nobody’s buying.
How does that happen?
Have you heard of self-awareness? What about unconscious bias? We’re merely skimming over some vast psychology topics, but when it comes to humans, much of the time, we automatically filter out what we don’t want to hear, distracted by what our brain builds to fill any unwanted gaps.
With an excited group of entrepreneurs, overly animated at the thought of becoming the next Amazon, Google, Uber, or Airbnb, they focus far too hard on the journey instead of the product.
These guys are great when it comes to raising capital, and what investor could fail to get caught up in the excitement they deliver (a smart one, it turns out-one who reads the figures and asks for some data)?
Does your idea pass this most basic of tests?
- Does your product solve a market problem?
- Will it meet your customers’ needs?
- What is it worth to your model customer?
- What does your customer look like?
- Are they prepared to pay for your product?
Quite often, the technology behind a project or product is ground-breaking. But just because you can, doesn’t mean you should. Too often, creators of such tech believe they're bound for success and the riches they deserve because of their attachment to the project. Sadly, that attachment, without valuable consumer research, is just a pipedream.
The critical point here is-before you start picking out your team, creating your MVP, knocking down the doors of your investors-you must allocate data to your dream.
For some entrepreneurs, even hard data isn’t enough to swing the momentum
Even by engaging with potential customers at the very beginning of the journey, many founders are blinded by their own views on their product instead of their customers. That’s why data is essential.
Don’t just ask the questions; listen-really listen-to what your research is telling you.
Remember those subconscious biases?
Your brain is programmed to skip what it doesn’t like, to build a better picture for itself, one that leads to success and avoid the dreaded failure. That way, it can dodge the feelings of shame we’re hard-wired to deflect, producing the adrenalin and dopamine we thrive on. That’s why when it comes to business, it’s better to listen to the facts than our emotions-and not just in business-it makes good sense in our everyday lives too.
If your customer tells you that they wouldn’t buy your product, or it’s too expensive/complicated/unnecessary, then it probably is. Get off the train while you still can, and put your energy and efforts into something with a sensible chance of success.
Could investors be part of the problem?
Possibly. Venture Capitalists expect to invest in failures with a unicorn-spotting rate of well under 10%. The big pay-offs cover the losses of those unsuccessful options, so it’s all part of the game to them.
When our startup receives their initial investment, those large sums deliver false confidence that the investor trusts and believes in the product, where it’s more likely they’re investing in the enthusiasm and delivery of the pitch made by the founder.
The take-out: listen to the data
Listen to your customers. Ask them about your product before you start building, writing or selling. Listen before you start-listen while you build-listen when you launch.
Listen. And hear what they’re saying.
If they say they wouldn’t buy it, wouldn’t use it or have no need for it, if you can’t fix it so they would, then wash your hands, step aside, and move on to your next idea.
Ask your customers and listen to their responses throughout the entire process. Only that way will you know you’re delivering a product or project that someone wants and is willing to pay for. It should ensure you set off on the right foot instead of shooting yourself in it.
Category 2: A profitable product, poorly managed
So, what happens when the product is good? When everything appears viable? People want your product (or so your consumer research and testing tells you), yet still, things go awry, and the venture fails.
Well, heading back to our list from CB Insights from 2021, the top factor was budget-running out of or failing to raise cash/capital.
- Ran out of cash/failed to raise new capital – 38%
- No market need – 35%
- Outcompeted – 20%
- Flawed business model – 19%
- Regulatory/legal challenges – 18%
- Pricing – 15%
- Wrong team – 14%
- Mistimed – 10%
- Disharmony – 7%
- Poor pivot strategy – 6%
- Burned out/lack of passion – 5%
38% of failed startups boils down to budget
Linked to what we learned from Category 1, one reason startups run out of capital is that they’re flogging a dead horse-throwing good money after bad. They won’t even see it, with such solid passions for making it big off their one great (that turns out to be not so great) idea.
Another is not playing the long game and spending far too much, too soon, on the wrong things. Luxurious office spaces, expensive logo work, design and branding, hiring teams of people they don’t need or aren’t yet ready for-it’s too easy for the too confident to get carried away and when it comes to buying into the items and partnerships they actually need, well, there’s too little left in the pot.
Then there are those who have a great product but can’t locate the ideal investor. Ultimately, business is about people finding the right people to work with. Finding the right investor for a project could well be the biggest brick wall they’ll face.
So, what’s the secret?
There are so many pitfalls lining the path of our startups. A list of the most likely, like that of CB Insights, is a good reminder of where to stay focussed with a big eye on the details.
Planning and focus are essential, as is working with your data sets.
Define, develop, and validate every step, ensuring you know exactly what you want from your project before you start building. Then, validate it by guaranteeing it delivers everything your customers expect.
Be passionate, persistent, and ready to scale. So many startups fail to scale; that could well be through a lack of resources and investors. Alternatively, they might not pivot when they should have, pivot too soon, or in the wrong areas. Keeping the journey exciting and encouraging with a strong eye on your industry should help prevent despondency and burnout.
And keeping tight hold of those purse strings, however much capital you’ve raised, will ensure you’ve always got something in the bank for when you really need it.