Why Startups Fail

Accountancy Best PracticeCorporate Strategy
Written By Vignes Rajagopal

The technology analysts CB Insights have curated some amazingly valuable information over the last 6 years looking at why startups fail.  In this time, they have conducted over 350 investigations into startups that failed, identifying the most common reasons. 

Here Dragon Argent summarise their findings.  It’s worth noting that often there are multiple reasons startups fail, so you’ll notice the top 5 reasons given below don’t add up to 100%. 

On particularly interesting insight that came out of CB Insights analysis was that they found around 70% of upstart tech companies fail around 20 months after first raising financing, usually with about $1.3M in total funding closed.  This is possibly the point at which founders started to feel like they were receiving validation, had some breathing room and possibly let their focus wander. 

Number 1: No Market Need (42%)

Tackling problems that are interesting to solve rather than those that serve a market need was cited as the No. 1 reason for failure, noted in 42% of cases.  A failed startup, Treehouse Logic, addressed this directly in their post-mortem, writing:

“Startups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behaviour, great reputation as a though leader, great expertise, great advisors, etc, but what we didn’t have was technology or business model that solved a pain point in a scalable way.” 

Number 2: Ran Out of Cash (29%)

Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by startups (29%).

As the team at Flud exemplified, running out of cash was often tied to other reasons for startup failure including failure to find product-market fit and failed pivots:

“In fact what eventually killed Flud was that the company wasn’t able to raise additional funding. Despite multiple approaches and incarnations in pursuit of the ever elusive product-market fit (and monetization), Flud eventually ran out of money — and a runway.”

 

Number 3: Not the Right Team (23%)

A diverse team with different skill sets was often cited as being critical to the success of a company. Failure post-mortems often lamented that “I wish we had a CTO from the start,” or wished that the startup had “a founder that loved the business aspect of things.”  The Standout Jobs team exemplified this problem, writing in the company’s post-mortem:

“The founding team couldn’t build an MVP on its own. That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t.”

 

Number 4: Out Competed (19%)

Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space. And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 19% of the startup failures.   Children’s apparel delivery service Mac & Mia found itself in a tough spot competing with highly successful companies and shut down only a year after its 2018 launch:

“Mac & Mia faced a host of competitors in the children’s delivery box space, including the aforementioned Stitch Fix, which launched its kids clothing service in 2018. Stitch Fix went public in 2017 and has a market cap around $2.7 billion. At least 20 other upstarts have launched similar delivery services for children’s clothes.”

 

Number 5: Pricing / Cost Issues (18%)

Pricing is a dark art when it comes to startup success, and startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers.  Delight IO saw this struggle in multiple ways, writing,

“Our most expensive monthly plan was US$300. Customers who churned never complained about the price. We just didn’t deliver up to their expectation. We originally priced by the number of recording credits. Since our customers had no control on the length of the recordings, most of them were very cautious on using up the credits. Plans based on the accumulated duration of recordings make much more sense for us and the number of subscriptions showed.”

  

With the right professional advice at the right time, many of these problems can be addressed.  Whether it is enhancing decision making with accurate management accounts provided by an outsourced CFO, working with a strategy partner to define product fit, taking corporate governance advice to build an appropriate board or working with a corporate team to manage the best possible funding round, recognising when to engage external support can be the difference between success and failure.

If you'd like to discuss any of the challenges addressed above, please contact Dragon Argent.

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