The Top 20 Reasons Startups Fail

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CB Insights analyzed 101 startup failure post-mortems and came up with the top 20 reasons startups fail. Here they are. These were complied with the help of the founders. Note the total is far more than 100% so obviously some startups failed for multiple reason. And following the graph will be my take on the top 5.

top 20

No Market Need

One of the many mentoring programs I’ve been involved with at MIT is I-Corps.  I-Corps was founded after the National Science Foundation analyzed their data on grants to scientists and engineers and found that while many attempted startups, a very large portion of them failed. And the number one reason they failed was because they built something no one needed! In other words no market need. There’s a lot to I-Corps but here it is in a nutshell:

The National Science Foundation (NSF) I-Corps program prepares scientists and engineers to extend their focus beyond the university laboratory, and accelerates the economic and societal benefits of NSF-funded, basic-research projects that are ready to move toward commercialization.

Through I-Corps, NSF grantees learn to identify valuable product opportunities that can emerge from academic research, and gain skills in entrepreneurship through training in customer discovery and guidance from established entrepreneurs.

As you can see the NSF study and the CB Insights study came to the same conclusion. And I’ve been there done that. I think that many entrepreneurs have been unduly influenced by Steve Jobs comment that “customers don’t know what they want until we show it to them” in explaining how he never did market research. Well if you are a genius like Steve Jobs, who had close to 20 years of experience in the personal computing market, maybe this is true for you too. But for all the rest of us I highly recommend you get out of the office and talk with prospective customers. Just because you and some of your friends need what you plan to build that does not extrapolate to a large market. If you only pay attention to this point of failure you’ll up your chances of success dramatically.

Ran out of cash

Cash is king in startups, as the saying goes. That’s why out of the three standard financial statements you need to monitor cash flow is the most important. One reason startups run out of cash even if there is market demand for their product is that the bigger the company the slower they pay. 60 days, 90 days, even 120 days is not uncommon in B2B businesses. And if you are a B2C market then chances are the costs of customer acquisition will get you every time. Even if you look at so-called successful public companies like Tesla and Snap, parent of SnapChat companies they are losing billions in the case of Tesla and millions in the case of Snap.  So the lesson here is to understand your costs of customer acquisition upfront and plan for it, or it will literally kill you. If there is little market demand for your product it just stands to reason you will run out of cash.

Not the right team

Team is the number one criteria most VCs use to judge a startup and the CEO is 75% of the team. So you may have a tech wizard as your CEO, but he or she may lack the skill set to build and develop a business.  And there needs to be team/market fit as well. You need at least one of your founding team members to have domain expertise, that is subject matter expertise in the industry segment you are entering. And I’ve written elsewhere about the need for team alignment. This is why a true team like the Patriots could no doubt beat a team of all-stars, because they are totally aligned from years of practicing together and being coached by one of the top coaches of all time.

Get outcompeted

I have been there and had that done to my venture. For reasons I don’t recall somehow we managed to be oblivious to a very entrenched competitor right in our own backyard. While I do totally agree with Jeff Bezos and his dictum that a venture needs to focus on customers, not competitors, with the network effect turning companies like Google and Facebook into virtual monopolies a startup team needs to understand the weaknesses of competitors, and as 1890’s baseball batting champion Wee Willie Keeler said, “Hit ’em where they ain’t. More recently there’s a book entitled Blue Ocean Strategy that expands on Wee Willie’s theory. The book’s sub-title tells you all you need to know: How to Create Uncontested Market Space and Make the Competition Irrelevant.

Pricing/Cost Issues

I find this a quicksand issue for founders: they have to go there but the more they fail the more stuck they get. Once again the success of a few heavily influence founders, in this case Spotify, that has successfully executed a freemium strategy. But that doesn’t mean that you can! There are a couple of ways to approach this and one of them is wrong: time and materials plus a fixed profit margin or value-based pricing. The former is the standard in mature commoditized markets like carpentry. But a startup will never grow very large unless they have a value-based strategy. But doing this is far harder than writing about it! Founders can tackle this horror in several ways: determine the customer’s cost for their current solution; demonstrate a compelling ROI, a high lifetime customer value, and a high customer retention rate. The problem with all these is that they are purely hypothetical until you actually hit the market. One method, used by
Steve Blank and taught to his students, is simply to ask the customer. You should start high and work your way down until you hit a price point that a majority of customers tell you they are willing to pay. Entire books have been written about pricing, so this is all I can say aside from using A/B testing, where you price it at one price in one territory and a significantly higher one in another.

I do recommend you read the full article from CB Insights – they got their data the right way, through primary marketing research, a fancy way of saying they interviewed the CEOs of failed companies. The truism in the startup ecosystem is you learn valuable lessons from failure. I urge you to learn those lessons from the failures of companies other than your own!

 

 

 

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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