Why are so many startups doomed to fail?
Your startup will likely fail.
Get used to it.
The startup world is incredibly volatile and one fraught with many ups and downs, risks and huge losses and gains of potential investment and funding.
In an article recently published by FastCompany titled; ‘ Why most venture-backed companies fail’, it was stated that the failure rate of new startups is estimated to be at around 75%, an incredibly alarming statistic for young founders and budding entrepreneurs.
Many industry analysts have attempted to pinpoint exactly why the failure rate is so high, with some suggesting everything from lack of market need, poor marketing, mistimed product release and a lack of customer focus.
Despite this looming and intimidating failure rate, more and more startups are incorporated each year.
And, for those of you still looking to start your business, don’t be too alarmed, as the failure rate for new businesses in any sector is roughly 80%, according to the 2016/2017 Global Entrepreneurship Report.
So, even if you do experience failures in your first few ventures- don’t worry, you have plenty of company!
Failure is a part of life
Patrick Henry, CEO of QuestFusion, recently stated in an article for entrepreneur.com, that he has observed a ‘common set of reasons that certain startups struggle and fail, as well as a consistent set of factors that make other startups become successful’.
Mr Henry took this suggestion a step further and decided to embark on a journey to back up his observations with some hard data.
So, let’s take a look at some of the main reasons why the failure rate of new startups is so high, and what perhaps can be done to minimise risk and increase your chances of success in an incredibly competitive environment.
The facts
In a recent study, data firm CB Insights conducted research with a variety of startups and with the help of some courageous CEO’s, collected information on the top 20 reasons for why most startup companies fail, as well as ranking them in terms of their significance to the failure of the relevant companies.
The research yielded some very interesting results. The top factors include;
- No market need
- Ran out of cash
- Not the right team
- Got outcompeted
- Pricing/cost issue
- Poor product
- Need/lack business model
- Poor marketing
- Ignore customers
Whilst is important to note that there is no doubt many more reasons as to why startups may fail, these were the top 9 as voted by a large cross-section of CEO’s and founders, and represent a significant portion of the most significant factors contributing to a startups failure.
It is also important to acknowledge that, of the top voted reasons for startup failure, the vast majority had to do with, or were some incarnation of poor leadership- a treacherous area for anyone beginning a company from scratch.
It seems clear that when beginning a startup company, one must accept the very real possibility of failure, and a healthy relationship with this possibly is undoubtedly a realistic one.
There is a danger, however, of the normalisation of failure, as Michael Wolfe put it, in a recent piece for inc.com; ‘The industry’s acceptance of failure can often be misinterpreted as fetishising it — even suggesting that failure can be more rewarding than success.’
The lucky ones.
Despite the innumerable startups that fail, there are also plenty that succeeds and believe it or not, but there are some common factors in those which do rise to the top of an incredibly competitive industry.
A sad fact that everyone will need to swallow at some point, is that although you may have all the hallmarks of a successful founder, it by no means guarantees you success. You can, however, do everything you can to minimise your chance of failure.
Common traits of those few successful founders, stated by Patrick Henry’s study in include;
- Founders are driven by impact, resulting in passion and commitment
- Commitment to stay the course and stick with a chosen path
- Willingness to adjust, but not constantly adjusting
- Patience and persistence due to the timing mismatch of expectations and reality
- Willingness to observe, listen and learn
- Develop the right mentoring relationships
- Leadership with general and domain-specific business knowledge
- Implementing “Lean Startup” principles: Raising just enough money in a funding round to hit the next set of key milestones
- A balance of technical and business knowledge, with necessary technical expertise in product development
A study titled ‘Performance Persistence in Entrepreneurship’, conducted by the Harvard Business school, concluded that those successful in their first business venture increased their chances of secondary success by a factor of 10%, and this increased the more success these founders had.
So what can we take from this?
Success begets more success.
This might seem daunting for those yet to embark on their first venture. One thing is for certain; though the risk of failure might be great, if you minimise your chances of failure in every way possible, you might just become one of the few that find a path to startup success.
