Why Do Startups Fail?

A while ago I wrote about why innovations fail, and I wondered about start-ups. Do they have the same problems, or are they completely different?

How often start-ups fail is a matter of debate. A commonly quoted figure is that 90% of venture backed start-ups don’t make it. Failure being defined as not returning the initial capital to the investors. In 2017 Erin Griffith reported in Fortune that a study by Cambridge Associates of 27,529 start-ups showed a failure rate of around 60%. Although I am slightly worried that the only source for this figure is the Fortune article and people quoting it. Why is the original report not online?

However, whether it is 9 out of 10 or 6 out of 10, the point is that most start-ups fail. But why do they fail?

Searching around for some information, I found surprisingly little research and a lot of ‘everybody knows that…’ assertions. I did find a fascinating study by the market intelligence company CBInsights. Since 2014 they have been collecting the stories from founders and investors on why start-ups failed. They now have 253 post-mortems with a summary of the story. From these they have picked out the most common seeds of failure.

We have to be careful that these are personal reports from people deeply involved in the start-ups, and it is difficult for them to be objective. As with reporting success, if you are very close to a project it is easy to underestimate or overestimate the importance of particular factors, or to find reasons that fit with your own beliefs.

The biggest single reason that start-ups fail?

Warning out of the way, what did CBInsights find?

The number 1 reported reason for start-up failure was that there was no market need. Over 40% of the stories highlighted the same problem. Exactly the same principle reason that innovations fail.

And why is that the main reason for failure? Because as innovators we become excited by the idea itself. We become so personally committed to the idea that we forget to ask all those niggling questions like – what does this enable the customer to do that they couldn’t do before, how much do they care, and crucially, how much will they pay?

The top 20 reasons for start-up failure

Of course, solving a problem that the customer does not have is not the only source of failure. The top 20 reasons for failure picked by CBInsights were:

1. No market need
2. Ran out of cash
3. Not the right team
4. Outcompeted
5. Pricing / cost issues
6. User unfriendly product
7. Product with no business model
8. Poor marketing
9. We ignored the customers
10. Product mistimed
11. We lost focus
12. Disagreements amongst team / investors
13. Pivot gone bad
14. Lack of passion
15. Failed geographical expansion
16. No interest from investors
17. Legal challenges
18. Failed to use network
19. Team burn out
20. Failure to pivot

Many of these would also be found on any list of reasons for product failure. More interesting is that at least 7 out of the 20 relate to the customer need and the relationship with the customer:

1. No market need
2. User unfriendly product
3. Product with no business model
4. Poor marketing
5. We ignored the customers
6. Pivot gone bad
7. Failure to pivot

Only pricing and cost issues, and the user friendliness of the product relate in any way to technical performance. Yet this is where many start-ups and innovation teams put most of their attention and resources.

It’s the customer stupid!

The lesson is that whether you are building a start-up or developing a new product/service, it is the failure to pay enough attention to the customer and their needs and wants that will bite you.

Or to simplify even further – It’s the customer stupid!