Why startups fail: it’s about people, not just the money
With 60 per cent of all new businesses failing in the first three years, a new report by CB Insights has analysed over 100 startups and identified the top 12 reasons why they don't make it
For new entrepreneurs and businesses, it is important to understand why startups fail. An insight into the issues that companies may experience provides a very relevant lesson for anyone in the entrepreneurial ecosystem.
CB Insights – a technology insights platform – has analysed 111 post-mortems since 2018 to try to find the top reasons why start-ups fail. Although there is rarely a single reason for a particular startup’s failure, its report identifies a pattern and outlines 12 of the most common reasons.
Five per cent of failed startups analysed by CB Insights blamed burn out or lack of passion as a reason for failure. The ability to share responsibilities with a diverse team and redirect efforts and cut losses when met with a dead end is important to succeeding and avoiding burnout.
Conversations surrounding burnout in the startup world are often difficult due to the widespread belief that burnout is required to be successful. However, former Uber board member Arianna Huffington described this culture as ‘a delusion’. Disharmony among a startup’s team and its investors was blamed by seven per cent of companies; it can have catastrophic repercussions. For example, for Hubba – a Toronto-based retail startup – discord between its CEO and board of directors forced it to shut down after five years.
Having the right team with a diverse range of skills is also vital for success. Almost 15 per cent of companies blamed lack of experience combined with mismanagement for their downfall.
While eight per cent of startups suggested that having a poor product was the reason for their failure, 10 per cent believed it was due to mistiming their launch. Release a product too early and users may write it off as not good enough, but too late and you miss the window of opportunity. However, a flawed business model could mean startups never even have to deal with these issues. Failing to find ways to make money at scale and adapting to change can cause investors to pull out.
Pivots like ‘Burbn’ to ‘Instagram’ have proven to be extremely successful. However, for some startups it can often be the reason for failure. Inboard Technology, for example, failed when it pivoted away from selling directly to consumers. Startups with exciting and innovative ideas will also naturally face competition and being out-competed is the third most common reason for failure.
While too strong a focus on your competition is not healthy, startups should take note to not ignore it. Failure to act caused 20 per cent to close. Furthermore, 35 per cent cited ‘no market need’ as a reason for failure. This is where a startup focuses on tackling problems which do not serve a market. For example, Jeffrey Katzenberg, founder of Quibi, suggested its failure was due to the idea not being ‘strong enough to justify a stand-alone streaming service’. Therefore, it is vital to make something people want but to also know where you stand in the market.
Pricing a product correctly can be difficult. It must be high enough to cover costs but not too high that it deters customers. HeyTiger was one of many startups that failed to get this right and paid the price. However, even if a startup does manage to price its product correctly, it is often faced by regulatory or legal challenges.
For example, recent trade wars between America and China caused costs to skyrocket due to increased tariffs. This meant companies such as Coolest Cooler were unable to continue operating. The top reason for startup failure may not come as a surprise – 38 per cent of startups blamed a lack of money for their failure. This was the case for Daqri, Aerion Corporation, Wow Air and many other startups who failed due to financial difficulties.
However, what may be surprising to many new entrepreneurs is that most of the issues startups face are not solely financial but people driven. Therefore, startups must have a people-centric approach to be successful. No matter how much financial backing startups have, it is people and customers that drive business.
The question we now must ask ourselves is, as the true cost of the pandemic begins to be unveiled, will we see a shift in the reasons behind failed startups?