Take it from me: Startup failure is incredibly common. While every entrepreneur wants their venture to succeed, the reality is that nine out of ten startups fail.
Indeed, from revenue projections missing the mark to expensive marketing campaigns failing to make an impact, I’ve seen new companies fail in countless ways. A whopping 10% of startups don’t even make it past their first year.
In this article, I’ll talk through why startups fail and expert tips for how you can avoid some common mistakes.
Table of Contents
Why Do Startups Fail?
In general, startup failure means that a business is forced to halt its operations. That said, I’ve learned that there are a lot of different reasons a startup can fail. Below, I’ll share some of the most common causes of startup failure, as well as strategies that you can use to address these risks and maximize your startup’s chances of success.
Mishandling Finances
According to recent data, 82% of startup failures are driven at least in part by cash flow issues. Over the course of my career, I’ve seen just how damaging it can be to run out of money (or burn through it too quickly). While startups typically start with some source of funding, mishandling finances can hinder an organization’s ability to find new investors or generate enough profit to survive.
Interestingly, entrepreneurs often blame investors for not dishing out enough money, but startup consultant Chase Spenst advises against this mentality. As he explains, there’s usually a good reason investors choose not to invest: “Investors probably didn’t give [startups] money because they weren’t doing that well, or they didn’t show much promise.”
As such, I’ve learned that to keep your company on the right financial track, you need to create a budget that considers startup costs, emergency expenses, and future investments. All else being equal, it’s best to be conservative when projecting your revenue, and to try to limit your spending to the essentials.
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Misreading Market Demand
Sometimes, flawed or inadequate market research leads businesses to misinterpret consumers’ willingness to pay for a product or service. In other cases, a founder might have a strong personal bias for their startup, making it hard for them to evaluate market demand objectively.
To avoid this common pitfall, I always recommend putting aside any personal attachments to the business and conducting extensive, quantitative market research. It’s also often a good idea to start with a minimum viable product, or MVP, to validate your idea without breaking the bank.
Competition
What happens if another company redesigns their product to compete with yours after you enter the market? What about if your target customers have strong brand loyalty to your competitors? Whatever the cause, even if your startup has a superior idea or business model, rival companies can pose high barriers to entry that stop startups in their tracks.
As serial entrepreneur Raam Gotimukkala explains, “20% of startups fail because they’re outcompeted by other businesses.” He notes that a startup may be outcompeted for many reasons — whether that was because they were late to market or because they failed to differentiate themselves from their competitors.
Of course, there’s no way to fully eliminate the risk of competition. But just as understanding market demand can help startups ensure they’re targeting the right customers with the right products, so too can entrepreneurs beat their competitors by researching them. Through a detailed competitive analysis, you can identify areas where you are likely to outperform your rivals — and you can avoid getting blindsided in areas where you are likely to face stronger competition.
Misaligned Founders
I’ve seen firsthand just how important it is for founders to be aligned. Even if you’ve got a good product with a clear market and competitive differentiation, strategic misalignment between founders can put the last nail in any startup’s coffin.
This is more common than you might think: according to research, 65% of startups fail because of conflict between founders. As such, founders need to set ground rules to govern how they handle their differences — and always remember to communicate, communicate, communicate.
In addition, finding the right co-founder before launching can also help prevent interpersonal conflict from arising.
Pricing and Cost Issues
It takes time to figure out how to price a product. You want it to generate enough profit to keep your business afloat, but prices also need to be low enough to entice consumers to buy your product. Too high, and buyers avoid it. Too low, and your startup makes no money.
SaaS product marketing specialist Prashanthi Kolluru speaks compellingly to this challenge, arguing that “SaaS startups often fail to craft a pricing strategy that resonates with customers while also ensuring the financial health of the business.”
She goes on to say that, “It is a complex balancing act that requires careful consideration, as getting it wrong may lead to failure. The price must be compelling enough to entice customers, yet it must also cover costs and contribute to the company's profitability.”
Pro tip: To figure out the optimal price, look at your fixed and variable costs, your competitors’ prices, and your audience. You might not land on the perfect price immediately; this process often requires some trial and error. Moreover, if you find that consumers refuse to pay a sustainable price for your products or services, it could mean that your business model isn’t viable.
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Poor Product Quality
If your product fails to deliver on its promise, consumers will likely perceive it as poor quality, potentially leading them to abandon your business or even leave negative reviews. I’ve seen some startups try to mitigate this by employing aggressive sales tactics, but personally, I wouldn’t recommend that route. Instead, great founders do everything they can to create a product that meets and exceeds customers’ expectations.
There are lots of strategies that can help you optimize for quality, from conducting user tests frequently to proactively sourcing feedback from prospective customers. But most importantly, as Helix Infrastructure CEO Dr. Phillip Hearn notes, improving product quality “means embedding [quality management] practices into routine processes so everyday operations are based on high-quality workmanship instead of an afterthought.”
In other words, you can only build a quality product if you intentionally (and consistently) prioritize quality.
Ineffective Marketing
As the former head of marketing for two different startups, I’ve learned that great marketing can be incredibly powerful — and bad marketing can cause serious damage. This might mean running poorly designed online ads, or launching a campaign on a platform your audience doesn’t actually use.
Whatever the cause, entrepreneurs cannot afford to fumble through marketing. To the contrary, to get a business up and running, marketing needs to be a priority.
Pro tip: If you’re not sure where to start, begin by creating a comprehensive marketing strategy. First, identify your audience, and then figure out what they want, where you can reach them, and how they respond to information.
How Many Startups Fail in Different Industries?
Recent research indicates that startup failure rates vary widely across industries, from a 63% failure rate among information startups down to a 42% failure rate for finance, insurance, and real estate.
Below, I’ve laid out failure rates for several key industries.
- Information: 63%
- Transportation and utilities: 55%
- Retail: 53%
- Construction: 53%
- Manufacturing: 51%
- Mining: 49%
- Wholesale: 46%
- Services: 45%
- Agriculture: 44%
- Education and health: 44%
- Finance insurance and real estate: 42%
Of course, even within a given industry, there can be a lot of variation. One recent study categorized industries in the information technology space as growing, maturing, or declining based on their early-stage funding and five-year exits.
Specifically, this report defines growing industries as those with an increasing number of investments and exits, as this points to higher rates of success. For example, the report classifies the following industries as growing:
- Artificial intelligence and big data. 98% Series A growth rate; 93% exits growth rate
- Advanced manufacturing and robotics. 114% Series A growth rate; 61% exits growth rate
- Blockchain. 118% Series A growth rate; 52% exits growth rate
- Fintech. 74% Series A growth rate; 25% exits growth rate
Conversely, the report categorizes the following industries as mature:
- Edtech. 42% Series A growth rate; 22% exits growth rate
- Cyber security. 44% Series A growth rate; 0% exits growth rate
- Cleantech. 39% Series A growth rate; 0% exits growth rate
- Life sciences (e.g., biotech). 33% Series A growth rate; -11% exits growth rate
And finally, it characterizes these industries as declining:
- Digital media. -16% Series A growth rate; -24% exits growth rate
- Adtech. -33% Series A growth rate; -51% exits growth rate
So, what does this mean for founders? While launching a startup is always risky, targeting a growing industry can help to reduce the risk. After all, the data suggests that ventures in these spaces are more likely to receive investment, and they’re more likely to grow.
Still, a third of startups fail after raising a Series A, emphasizing that even these initially positive signs don’t guarantee that a startup will succeed.
But as Spenst explains, “the earlier on the failure, the more likely it’s because of an internal issue,” while a startup that fails after raising Series A funding likely does so because of more external factors (such as a market shift or new competitors).
On the other hand, a startup might fail at the seed-funding stage because of a poor idea or inadequate market research.
Startup Failure Is More Common Than You Think
While entrepreneurs can try to prevent failure as much as possible, it can rear its ugly head at every step. By understanding how often failure occurs and why it happens, entrepreneurs can brace themselves for when it happens to them.
As I worked on this article, I was struck by how common startup failure is. While every founder dreams of building a unicorn, the data shows that there are in fact many, many ways a startup can fail. Take heed of these warnings and you’ll lessen your chances of failure and set yourself up for long-term success.
Free Business Plan Template
The essential document for starting a business -- custom built for your needs.
- Outline your idea.
- Pitch to investors.
- Secure funding.
- Get to work!
Download Free
All fields are required.
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