Reasons why startups fail

Author: Miguel Teixeira
2016-08-04
Tags: Fail, Startup, Challenges, Product, Market, HR


In this article we will take a look into the main reasons why startups fail and dig deep into understanding the challenges and hurdles that startups face.

Prepare to win

In order to increase your startup's chances for success, it helps if you understand and prepare for the challenges ahead. With that objective in mind, we will breakdown one of the most well known studies on startups, The Top 20 Reasons Startups Fail by CBinsights. Just to be clear we are critical about how this study was conducted, but we also value the data collected. We will try our best to produce an insightful analysis to this study, so that we can make sense of the data collected.

Criticism about the study

The main criticism about this study is that the answer options, given by the 101 post-mortems entrepreneurs, are often filled with duplication and actually mean the same thing. Let's take for instant, "No market Need" and "poor product". A poor product is a product that the market does not need, or does not understand it. Another way to say the same thing is to say you had price/cost issues, which means that the market wasn't willing to pay as much as you needed to charge for the product.

The results:

After grouping the answers by subject the results were as follows:
  1. Product Market fit - 37.79%
  2. Human Resources – 24.75%
  3. Marketing – 22.41%
  4. Financing Issues – 12.37%
  5. Legal – 2.68%
Startups fail

Main Reason: Product Market Fit

When you say "No market need", "Got outcompeted", "Pricing/cost issues", "Poor product", "Need or lack a business model", it basically means that your market isn't willing to pay for your product. There is really no surprise there. Almost 40% of companies fail because of this. This is why the iteration/pivot approach championed by many, like Eric Ries in the Lean Startup, was written and has become the main philosophy in product development. The problem is clear: you need to test and keep perfecting until you have the product that the market wants. To assume you know what the market needs are, is frequently fatal for your startup. It is important to keep testing your assumptions and prepare your company to test frequently and fast.

To do so, and deliver a product or service that the market needs, it must add value to the customer. For that reason, a business model becomes critical to highlight core aspects of the business to create value in several contexts.

2nd Reason: Human Resources

This one is also not a shocker. Everybody has heard the story of friendships torned apart in the process of building a startup. Human Resources is a major challenge: from team building, to talent acquisition, capacity building, motivation, burnout, and even to dealing with investors. 25% of all startups fail because of Human Resources. Many entrepreneurs fail even to recognize Human Resources as a critical factor to their success.

3rd Reason: Marketing

Oh well, the dreaded Marketing, listening to your customers, understanding your market, spreading the word, setting the price right, branding, pivoting, setting up a store in a bad location. So many things that can go wrong. Marketing is an art form and to be able to produce good marketing is crucial for any business success, specially for a startup. Marketing is a very close third with 22%. Build your team around Marketing. It is fundamental to quickly absorb marketing insights and deliver the right product to the right market when they need it.

4th Reason: Financing issues

Wow, this is a shock! I would assume this would rank much higher among the opinion of entrepreneurs, as why their startup fail. Only 12.37%, and yet, so much time lost preparing pitch decks, reports and meeting investors. It makes you wonder, if the cliche, that what is often sold is really what you should focus on. The truth is that most business don't need investors from the start to be successful. The need comes later on, when you want to scale your business. Most startups don't need huge cash injection: they need work, vision, talent and team.

5th and final reason: Legal

Only 2.68% of entrepreneurs name legal as the main reason why their startup failed. That is a very low number. Although it is something that you should consider, seldom is the case that legal is critical for your business. Unless your business has some specific need, it should not be your focus.

Going back to the basics

In the end, it all comes down to the ability that a startup has to deliver a great product to the market. How do you do that? With a great team with complementary skills, ready to iterate its product as fast as possible until you achieve a great product/ market fit. On marketing you need to understand and act in your market. In the end is the same old grind. Nothing new.

Many approaches

We have now identified the most common disciplines you need to be able to mitigate the most recurrent risks in entrepreneurship. However, these disciplines are vast. There are many approaches to each of them. So no, there is not a recipe to rule them all. But you can prepare you company to create a symbiotic relationship with your customers to develop and improve products. You should choose carefully whom you work with. And you can always improve your marketing capabilities.

Methodology

To produce this analysis we used the report from CBinsights, The Top 20 Reasons Startups Fail. Then, we proceeded to group the answers given by the 101 entrepreneurs who had their companies fail. We group them in the following way:

Product Market Fit was composed by:

  • No Market Need,
  • Get outcompeted,
  • Pricing/Cost Issues,
  • Poor product,
  • Need/Lack Business Model.

Human Resources was composed by:

  • Not the right team,
  • Lose Focus,
  • Disharmony on Team/investors,
  • Lack of Passion,
  • Don't use network advisers,
  • Burn out.

Marketing was composed by:

  • Poor Marketing,
  • Ignore Customers,
  • Product Mis-Timed,
  • Pivot Gone Bad,
  • Bad location,
  • Failure to pivot.

Financing issues was composed by:

  • Ran out of cash,
  • No financing or investing.

And finally Legal from legal challenges.

Then we proceeded to add all the elements and convert to a base 100.

Final remarks

The results shown by this analysis weren't surprising. These conclusions seem to make a lot of sense and actually look pretty obvious, which is a good thing. But that doesn't mean it is easy. As always, you need a lot of clairvoyance and experience to run a smooth, well machined operation that excels at these themes. And that, let me tell you, is very hard thing to do.

Here at IdeaNinja, we have been contributing with several pieces on how to improve in many of these themes, with articles like:

Please take a look into it and thank you for your time.

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