December 14th, 2017 | By: Emma McGowan | Tags: Strategy
Fail fast. Fail forward. Those are just two of the mantras you’ll see hanging in startup offices and incubators across the globe. In the startup world, a failure is considered a learning opportunity, at the least; a feather in the cap of the Founder, at best. We fetishize failure. We normalize it.
But as much as we talk a good game about failure, the reality is that failing sucks. Just as no one goes into their wedding day planning for divorce, no one starts a company thinking, “Yeah, this one will just be my starter. I’ll get it right next time.” No wants to fail, and yet the majority of startups do fail.
According to an examination of startup businesses (by which they mean new companies in general) in the United States conducted by Statistic Brain, almost all new companies fail: 50 percent after five years and 70 percent after 10 years. Their data found that 46 percent of all companies in the US fail due to “incompetence.” That category includes everything from “emotional pricing” to “no experience in record-keeping” to “nonpayment of taxes.” The next 30 percent failed due to “unbalanced experience or lack of managerial experience”, followed by 11 percent failing due to “lack of experiences in line of goods or services.”
But while the failure rate for new companies in general is high, they’re nowhere near the failure rates of startups. A commonly cited number is “90 percent of all startups fail,” but one study by Harvard Business School senior lecturer Shikhar Ghosh found that the number might be closer to 75 percent. The “real” number is probably somewhere in between the two.
Regardless, it’s very high. So why is that?
While we can all share anecdotes about why startups we know failed, let’s take a look at the one actual study examining why startups fail. CB Insights analyzed 101 startup “postmortems” — you know, those Medium posts Founders do when their company goes under — to determine what the most common causes of startup failure were.
According to their findings, here are the top 13 reasons why startups fail, along with some stories from the Startups.co community that we hope will help other Founders who are trying to make it into that 20 (or so) percent that succeed.
The biggest reasons why startups fail is they create a product that the market just doesn’t want. Product/market fit is essential. Maybe they’ve figured out a solution to their own problem and didn’t take into account that other people didn’t have the problem, too. Maybe there were already better products out there. Or maybe the market just wasn’t ready for it. Or, maybe, the world just didn’t need what they were putting out there.
“In 2009 I spend $63,000, hired six part-time employees and spent nine months on a product,” Jevin Maltais, of the Built In A Day podcast, tells Startups.co. “Then I launched… To no one. The idea was to show everything happening on a map within three street blocks from you: all events, pictures and tweets. Turns out, no one cared enough about the problem I was trying to solve, and there was no path for it to make money. Lesson learned: Talk to people before you build anything!”
Another big issue? Running out of money before you can get anywhere. Even the lucky companies that land funding can find themselves staring down a very short runway, debating whether or not they’ll be able to afford the rent on their coworking space next month.
“At age 27, I started a business using money in my savings account,” Lyneir Richardson CEO of Chicago TREND and Executive Director of the Center for Urban Entrepreneurship and Economic Development at Rutgers University Business School, tells Startups.co.
“My business grew rapidly from $600,000 in revenue to over $7 million. I was recognized by the U.S. Small Business Administration as a Young Entrepreneur of the Year.
“But I had three major problems. First, I had a low profit margin on the product that I was selling. Second, I had a lot of payroll costs. Third, there was a long lag time between sales and no consistent recurring revenue. I now know that these are classic symptoms of a company with poor cash flow. The saying is that ‘Cash is King,’ but in my view, the saying should be ‘Cashf Flow is King.’ Ultimately, I had to sell the assets of my company at a discount, and I went out of business.”
The cliché in startup land is that a startup is like baby — and your Co-Founder is your spouse. And, like a lot of clichés, there’s a lot of truth in it. Your team can make-or-break your startup, as 23 percent of failed startups know all too well.
“I once tried to get a startup going,” Stephen Gibson, Founder of the startup review site Vyteo, tells Startups.co. “I joined with a partner and we began working on new projects. Every couple weeks or so he wanted to work on a new project, leaving the previous one behind. Over a short span of time we had three to four projects in the works. We obviously didn’t get anywhere and eventually went our separate ways. Having the right team and partner-fit is essential to getting things off the ground.”
Whether it’s one of the big companies doing exactly what you do or smaller companies killing you with a thousand little bites, getting outcompeted is the reason why 19 percent of startups fail. (And regardless of who’s doing the outcompeting, it sucks.)
“My Sportswear brand, VO2 Sportswear, failed due to a combination of running out of cash and cheap entrants into the market,” Matt Tomkin of Tao Digital Marketing tells Startups.co. “We had grown to the point where we had built significant, to a startup, overheads which needed to be paid every month. We ended up having to try and compete with a flood of back-bedroom businesses that seemed to be happy to make pennies rather than pounds on the kit they were supplying. We just couldn’t compete with this type of approach.”
The best way to figure out how to price your product is to put a price on it and see what happens. Do you get a huge number of signups, suggesting that maybe you could raise the price? Does no one bite, suggesting you need to lower the price? Can you meet your company’s costs while simultaneously meeting that sweet spot of not too expensive and not too cheap?
Unfortunately, one reason why startups fail is because they can’t. It’s a balancing act — and tipping to either side can mean failure for your company.
Sometimes, startup Founders just come up short when it comes to product. That could be because they don’t actually know what they’re doing. It could also be because they didn’t understand their field properly before jumping in, as was the case for Jenni Schwanenberg, Innovation Evangelist of mantro GmbH, in her previous company.
“We wanted to create a hardware device that measures your consumption to give you a better price option,” Jenni says. “But doing the unit economics, we found out: There is a totally different dynamic in the market. Users can save 100 Euro for one time — and then nothing anymore. So we would create a product that had no recurring revenue and was basically useless to us.
We already worked on a hardware device and customer interviews for about three month when we found out and we put a full stop on the project.”
Business models aren’t sexy. They aren’t fun. But they are very, very necessary for the success of a startup. Unfortunately, 17 percent of startups failed because they didn’t learn this lesson soon enough.
“Create a business plan first so that you can stay focused and remain true to your long-term goals,” Deborah Sweeney, CEO of MyCorporation.com, tells Startups.co. “Business plans are typically 30 to 40 pages long, requiring time to draft up and objectively view the feasibility of your business. They cover everything from what your business does/offers to a (projected) timeline for your goals along with an analysis on your target audience and examination of your cash flow. Once you have the plan in place, you can really get the ball rolling on the business.”
No matter how great your product is, it’s going to fail if no one knows about it. Poor marketing is a major reason a lot of startups fail and one that I personally get a lot of questions about. While you don’t necessarily need a professional PR team at the beginning, learn from the failed startup pile and don’t ignore marketing. (Yes, even when you’re bootstrapping.)
“We ignored marketing,” AR/VR Expert Antony Vitillo tells Startups.co. “At the beginning, we just wrote code, but over time we discovered that marketing is as important as the product. If you don’t market properly, no one knows about your product and so no one can buy it, even if it is the best product in the world. Spreading the word may seem a waste of time, but it is fundamental for a business to survive.”
I can’t emphasize enough how important user feedback is to the startup journey, from the first germ of an idea through product develop and testing. I’m a firm believer in launching early with a minimum viable product and testing, testing, testing. When we’re talking about why startups fail, I’m actually surprised that this number isn’t higher than 14 percent.
“My three Co-Founders and I had developed an app for restaurants that allowed their customers to order and pay for their food independently of a waiter—by using the app,” Felicia Schneiderhan, Founder of 30 Seconds to Fly, tells Startups.co. “We had won a major competition in New York and got accepted to the reputable NYU Summer Launchpad accelerator. After six months of working day and night trying to find customers, however, we decided to shut down the company.
There were multiple reasons why our concept didn’t work. The most important one was that we missed product market fit. Our target market were small independent restaurants in New York City. These restaurants had many pain points, from inventory management to diminishing margins. They did not, however, even consider the option of saving personnel cost by replacing their waiters with technology. Let alone were they willing to pay for a technology like that. After we had talked to more than 200 small restaurant owners and managers we understood that the human touch and personal connection they had with their customers was one of their core value propositions. Our product clearly did not match that market segment.”
Some startups launch before their time and either the market or the technology just isn’t there yet. Others launch too late, although they might not know yet that it’s too late. That’s what happened to Bob Smith, Founder of Drive & Grow Rich, a monthly CD subscription service, in 2007. At age 33, Smith was pulling in $10 million a year.
Can you guess where this is going?
You got it: Technology killed the monthly CD subscription star.
Building a company takes time, effort, money and — focus. If you’re the type to get easily distracted or you have trouble finishing what you started, your startup might end up with the 13 percent who fell under this category of why startups fail.
“Ten years ago, my partner Hernán Amiune and I started with our first startup, the first online peer to peer credit platform in Latin America,” Cristian Rennella, CEO and Co-Founder of elMejorTrato.com, tells Startups.co. “The idea was excellent, the team also (two programmers with a lot of free time) and we even managed to raise USD 120,000 of investment, which at that time was a crazy lot of money! The reason for failure? Lack of focus!
“Unfortunately the media sells you the dream of overnight success but that is a plain lie. To do something big, you must dedicate a huge amount of time and effort. Remember: if you want to do something great without failing on the road, your best ally is to have focus! Forget the advantage of first movers, focus on who is still standing after the war.”
You know how it can sometimes be a terrible idea to be roommates with your best friend? It seems like a great plan — you love each other! You like hanging out! They’re pretty clean! — but when you actually move in, you end up losing your best friend and having to find a new place to live.
That kind of strife can also happen on a startup founding team or between startup Founders and their investors. Either way, it’s a quick recipe for startup failure.
“During the financial crisis in 2008 I had a startup which was focused on raising money for private equity, trading and investment advisory services,” Irina Lunina, CEO and Co-Founder at miramom tells Startups.co. “We had an amazing first six months and made a company profitable early on, but I did bump heads with my Co-Founder. Everyone has different work ethics, some work hard to make things happen and some just ride the wave. When I realized that I pull all the weight, then I really did not want to split profits with someone who just pretended to work. So, problems started and we split.”
Pivoting is another natural part of the startup lifespan: You launch a product, do some user testing, find out it’s not the right product/market fit, and you pivot to something else. In some cases, that pivot is what saves the company. But for others, the pivot takes Founders in the direction of one of those other reasons why startups fail listed above.
The CB Insights report actually found 20 reasons why startups fail, but we decided only ones over 10 percent had earned in-depth coverage today. For those of you who are interested, the other seven reasons why startups fail are:
14. Lack Passion (9%)
15. Bad Location (9%)
16. No Financing/Investor Interest (8%)
17. Legal Challenges (8%)
18. Don’t Use Network/Advisors (8%)
19. Burnout (8%)
20. Failure to Pivot (7%)
“I have learned over the years that the idea of failure is not only very personal to one’s context, but actually failure doesn’t exist,” Marcus says. “Every perceived failure in business is a chance to better hone one’s approach. Sure, having to close doors on the business is ‘a failure’ of sorts, but the true failure is if one doesn’t learn why that happened, and runs head first into the same situation again.”
Here that, Founders? Don’t let fear of failure scare you into never trying. Instead, learn from your mistakes and carry it forward. That’s doing failure the startup way. We here at Startups.co also have a bunch of tools that can help you avoid failure, whether it’s your first startup or your fiftieth.
You can engage with each one individually or, if you’re ready to really kick failure’s butt, you can bundle all tools on the Startups.co platform together to take advantage of significant bundle pricing discounts.
Check them out:
(And for those of you who are good at math, you’ll notice that these percentages didn’t perfectly add up to 100%. That’s because some startups cited multiple reasons because, you know, this stuff is complicated.)
Emma McGowan is a full time blogger and digital nomad has been writing about startups, living with startup people, and basically breathing startups for the past five years. Emma is a regular contributor to Bustle, Startups.co, KillerStartups, and MiKandi. Her byline can also be found on Mashable, The Daily Dot's The Kernel, Mic, The Bold Italic, as well as a number of startup blogs.
Follow her on Twitter @MissEmmaMcG.