Startups fail mostly because of marketing and team problems. The most common reason is no market need, which affected 42% of founders, while running out of cash usually follows from weak marketing or the wrong team rather than causing failure on its own.
Business books favor success stories, and survivorship bias makes the picture look better than it is: the majority of startups crash-land in their first 3 years. For founders, especially first-timers, studying failure is more useful than studying success stories. The CB Insights research portal listed the most common reasons for startup failure based on the post-mortems of 101 failed startups, and its 20 points come down to two causes.
Below, we go through startup failure statistics, the marketing mistakes behind failure (from skipped market research to failed pivots and user-hostile products), team problems such as disharmony, burnout, and lack of passion, the role of money, and whether startups are worth it.
Startup failure statistics
Only a third of startups make it to the 10-year mark, with every fifth failing during the first year. The worst startup failure rates for new businesses within the first five years include projects in construction, communications/utilities, transportation, finance, insurance, retail, and real estate. But these figures shouldn’t act as a reason to deprive yourself of the ability to have your say. A lot of things we love nowadays were never thought of in the past, and making something valuable out of nothing is a rocky road.
The very nature of a startup today, as opposed to 20 or even 10 years ago, is based on getting name and brand recognition, and growing market share at all costs. The number of apps in app stores has steadily increased with barriers to entry simultaneously decreasing. It means that getting started today might be easier than before. What’s tough is to break through the noise and stay afloat for long enough. This is where analyzing failure accounts instead of success stories can prove beneficial. So why do some startups succeed and others fail?
Marketing
Lack of adequate marketing research
The majority of problems with the product and the customers, like a user-unfriendly product, poor product timing, competition, pricing issues, etc. result from marketing research that wasn’t done properly. Including the most common problem with startups that affected 42% of founders — no market need.
For example, the meal kit startup Kettlebell Kitchen, which provided meal kits for specific diets, closed shop in November 2019, having had no opportunity to profit amid a crowded meal kit delivery market, with numerous rivals like HelloFresh and BlueApron. The cause of death for Vreal, a VR platform for video game streamers, was premature expansion, with the VR market developing at a slower rate than expected by the founders. Too often startup founders rely only on their own vision and on the opinions of friends and family, or/and don’t pay enough attention to the realities of the existing market. The importance of market research can’t be ignored. Otherwise, it can lead to a disability to solve market needs and a high rate of failures.
How to avoid
Product-market fit requires a product that people need to pay for and are used to paying for in order to solve a problem. The work of establishing a new venture should start with a long research phase, ideally long before thinking about the details of the product itself. Try setting up a landing page promoting early access to your product, getting traffic, and measuring engagement.
Poor marketing
At the same time, it’s common, even for products that fit the market, to lack proper marketing. Companies either sell their products in a way that doesn’t attract an audience, or they don’t understand what it is that people really want and try to push the wrong features. You can have the best product in the world, but if no one knows about it and isn’t appealing, then it won’t sell. Captivated by their product, many startup founders tend to neglect marketing efforts.
Project Management Mobile App by Nasim
How to avoid
The most important thing to realize is that no matter what business you are in, be it flower delivery or super tech VR/AR set, in reality, you are always in the marketing business. The sooner you realize it, the more chances for success you have.
Problems with pivoting: Pivot went bad/Failure to pivot
In startups, especially the tech ones, there are often two contrary concepts that have to be kept in mind: laser focus and the ability to pivot. The trickiest thing is to do them simultaneously without losing your balance. It’s important to outline the main goal of your project, not get sidetracked by secondary functions, and deliver what you’ve promised to your customers and investors. On the other hand, it’s not rare when startups make a complete restart with new ideas, and the basic concept almost always changes in one way or another affected by the market realities.
For instance, the Inboard Technology company that began as a Kickstarter project offering the development of electric skateboards failed in making a pivot to electric scooters. The drone company Airware stated in its shutdown announcement that “History has taught us how hard it can be to call the timing of a market transition. […] As we worked through the various required pivots to position ourselves for long-term success, we ran out of financial runway.”
On the other hand, if it happens that some of the secondary functions of your project prove to be far more popular among the audience than the primary one, it can be a wise decision to focus on exactly those functions. For example, YouTube has started a video-dating service but made a massively successful pivot into a major host of online videos as we know it today.
How to avoid
Keep focused on the main idea of your startup. Have a clear, realistic goal with a good 12-month, 2-year, 5-year, 10-year plan. Stay on target with the goal. Then again, don’t be blinded by over-focusing on your main goal at the expense of flexibility. Remember that the plan can change. If your 5-year plan looks the same after 5 years, then it’s out of date. Things change rapidly, and you should, too.
App development agency landing page by Shakuro
User-hostile product
It usually happens when entrepreneurs forgo the UI/UX design stage in an attempt to cut costs. Sometimes there can even be programmed from scratch products with no design at all. But successful products can’t be managed without the design phase. Even when working on flexible methodologies, you need to design first to avoid the situation that happened to the founder of the College Inside View startup. One of the reasons for the failures was underestimating the importance of design: “I had a strong belief that the value the site offered was mostly determined by the information and that it’d take a really bad design to detract from the value offering. I now believe that this is wrong.”
How to avoid
You always need to properly design a product first and make an MVP. But don’t go too far with cutting off vital functions.
Wrong team
Sometimes it can happen that however much expertise a team member has, they just aren’t up for this particular project. Startups require people that are startup-savvy. Or they may lack some vital qualities to make the project successful. The further the project goes, the more acute it feels.
How to avoid
Are startups good to work for? The best way is to hire experienced professionals to cover all areas of your business. For tech startups, there is one more option. You may consider the use of an external custom software development company with valuable startup-building experience.
Mobile Banking Application Design by Shakuro
Disharmony within team
For seed-stage companies with multiple founders, it is often the team dynamics that kill it. The pressure of working at a startup can be too intense for some relationships. Founders need to maintain quality communication with each other to avoid quarreling and misunderstanding.
How to avoid
Two words: team alignment. Don’t forget to work with your team. Make sure everyone understands what it’s all about. The majority of team members will change with the passage of time and it’s normal, whether they decide to go away by themselves or are laid off due to various reasons. Just make sure that new members understand and agree on the major goals of your company. Even if you are using the benefits of extended teams, as many other startup founders do nowadays, it’s still important to align your team around the main goals. In today’s global economy, the majority of startup teams are distributed ones. However, it’s still possible to maintain that level of transparency even if your team members are distributed all over the world. Check out our guide on remote work problems and solutions (the title says it’s about design, but most of the solutions are universal).
Burn out
Even if a project has survived for several years, founders may face the insidious problem of burnout, when after years of hard work people don’t feel like they have the same amount of energy or creativity anymore. Like the founder of the failed Blurtt startup has said, “The problem with burnout is that you become hopeless and you lose every aspect of your creativity. I’d go to work feeling tired and exhausted. I was burning the candle at both ends”.
How to avoid
The solution may be hiring additional talented and creative people and managing the life-work balance, however hard it can be when working on a startup.
Finance Management Mobile App by Shakuro
Lack of passion
The grind sets in. The idea is replaced with reality. This problem arises primarily when an entrepreneur doesn’t know what their motivation is and why they’ve started a business at all.
How to avoid
To successfully go through a crisis, you should have a clear understanding of why you’re doing what you’re doing: to get rich, to create a business and sell it, to change the world and leave a mark. Determine the real reason that drives you. But remember that even if you’re planning on selling it, be aware that you can only sell a business that works well.
Money
Finally, the financial problems that have sunk 37% of startups, are not the problems as such but the consequences of bad marketing or the team, that just wasn’t right for the task.
It’s not the lack of money that causes startups to fail. People and companies run out of cash when costs exceed income. When can it happen? As a result of failure to market the product (hence the loss of investors’ interest) or the problems with management.
If you’d like to learn about more ways how startups raise funds, head out to our separate article on the topic.
Costs of development
Although there is such a thing as the typical or average cost of website development, without a sufficient amount of detail, it’s impossible to estimate an app’s cost, just as it’s not easy to say how much a car costs without knowing its characteristics. On paper, it might look all cut and dried, but when reality hits you on the head, you get wobbly. That’s why it’s important for our team, our clients, and all potential app startup owners to have a strong mindset about the cost of website development and see how exactly it works.
FAQ
What is the main reason startups fail?
The most common reason is no market need: it affected 42% of founders. It usually comes from market research that wasn’t done properly, when founders rely on their own vision and the opinions of friends and family instead of the realities of the market. Poor product timing, competition, pricing issues, and user-unfriendly products often have the same root cause.
What percentage of startups fail?
Most of them. The majority of startups crash-land in the first 3 years of their existence, every fifth fails during the first year, and only a third make it to the 10-year mark. Failure rates within the first five years are highest in construction, communications and utilities, transportation, finance, insurance, retail, and real estate.
Do startups fail because they run out of money?
Running out of cash sank 37% of startups, but it is usually a consequence, not the cause. Companies run out of money when costs exceed income, and that happens after a failure to market the product, which makes investors lose interest, or after problems with management. That is why the underlying reasons come down to marketing and team.
How can a startup avoid failure?
Start with a long research phase before working out product details, and test demand, for example with an early-access landing page that measures engagement. Design the product properly and build an MVP instead of skipping the UI/UX stage. Treat marketing as part of the business from day one, keep the team aligned on the main goals, and hire startup-savvy professionals.
When should a startup pivot?
Pivot when market realities change or when a secondary function proves far more popular than the primary one: YouTube started as a video-dating service before becoming a video host. Stay focused on the main goal with a clear 12-month, 2-year, 5-year, and 10-year plan, but keep it flexible. If your 5-year plan looks the same after 5 years, it is out of date.
What team problems cause startups to fail?
The most common ones are the wrong team, disharmony among founders, burnout, and lack of passion. Experienced people may still not fit a startup, and the pressure can strain relationships between co-founders. Team alignment helps: make sure everyone, including new and remote members, understands the major goals. Founders also need a clear personal reason for doing the business.
Are startups worth it?
In hindsight, it all may look clear. In reality, of course, it is not so. There are multiple reasons for startup failures, but it seems that it all comes down to marketing and team. The Five whys method developed by Sakichi Toyoda for use within the Toyota Motor Corporation, states that there’s always a prime cause for everything, and it’s much more beneficial to learn how to fix that one big thing instead of trying to alleviate the consequences. Failure doesn’t happen by accident. It starts through ignorance which can be fixed.
In the future, startups will continue to lead innovation. Though some of the statistics may not sound encouraging, with careful planning and a lot of determination, it’s possible to create a product that would change the world and make your dreams come true.
Do you have a project that you want to bring to life? Contact us and let’s create a versatile product together.
Related reading
- Design-to-Development Handoff: Why Most Web Projects Fail After Design
- 5 Tips For Development Сost Optimization For Startups
- How to Create a SaaS Application: Complete Guide
This article was originally published in June 2020 and was updated in March 2022 to make it more relevant and comprehensive.