Most startups are not successful (Part 1)

Julia Chudinova

90% of startups fail. Though there are also another statistics that show 70% of startup tech companies fail and 97% of consumer hardware startups end up dying, turning into dust. It happens usually 20 months after first raising their financing. The reason for the failure of startups are all so varied, so CB Insights analyzed 101 startup failure post-mortems to find the common ones. Multiple reasons were taken into account, since a combination of circumstances leading to a failure was indicated in almost every report. That’s why the percentage number for reasons exceeds 100%.

The top-10 reasons for startup shuttering are:

  1. Lack of market need (42% of startups failed because of this reason). Those startups which indicated this reason did not research the market and found that their product did not enjoy any market need.
  2. Lack of cash (29%). It may sound banal, but insufficient funds can lead to a downfall. The financial problems may have an opposite effecr — having a lot of money doesn’t necessarily mean that any startup will go smoothly because misallocations and poor usage may also cause a failure.
  3. Wrong team (23%). One needs to find a highly motivated team, which will work on achieving long-term goals, since they precede a startup’s success.
  4. Too much competition (19%). If you enter a new market, you have plenty of advantages. However, you must be alert, because competitors will want to enter the respective field and outcompete you.
  5. Pricing issues (18%). Since pricing is a determinant of a company’s progress, it was difficult for some startups to set market-relevant prices.
  6. Poor product (17%). If you aim to launch a new product, you must be sure that it fulfills your customers’ needs, because nearly 17% of startups failed due to their products being user unfriendly.
  7. Business model (17%). Any startup must have in sight its future development, including monetization strategies. Any entity using investments as a means for their own operating must be ready to answer the questions from their investors regarding the growth and revenues.
  8. Ineffective marketing (14%). Passion about a product is not enough to make it really popular. For example, a startup may at the beginning achieve some progress but without proper marketing it will quickly go down.
  9. Not customer-centric (14%). Getting customer’ feedback and working on it is the way your company will retain its customers and lure in new ones.
  10. Poor timing (13%). You must be in the right place at the right time. This factor is supposed to be the one that made some companies successful since they managed to adapt their products to the needs of time.

Other reasons that were cited in this research are getting sidetracked (13%), discord in team (13%), pivot gone bad, lack of passion (9%), improper geographical expansion (9%), no investor interest (8%), legal challenges (8%), lack of network (8%), burnout (8%), failure to get rid of bad products, ideas and decisions (7%).

The founder of Idealab Bill Gross posits five factors which account for the majority of any given startup’s success. Timing appeared in his research to be the most important and accounted for 42 percent of the difference between success and failure. Timing means that consumers must be ready for a product offered to them. The second on his list was team/execution (32%) which was followed by idea (28%), business model (24%) and funding (14%). Among those companies that became extremely successful because of their ideal timing were Airbnb, Uber, Citysearch, GoTo.com, and YouTube.

According to another report of CB Insights, the top four reasons for failure are lack of consumer demand, high burn rate, lack of interest after initial crowdfund and product strategy effects. Failures are usually connected with false consumer and market strategy, financial issues and just plain burning out.

According to a popular stereotype, startups are usually founded by young people. However, a survey in the USA proved it to be a misconception. Researchers Pierre Azoulay, Benjamin Jones, J. Daniel Kim, and Javier Miranda used the US Census Bureau’s data and found that the average age of a startup founder who hires at least one other employee is 41.9 years. Geographical location has little influence on these statistics: the average age of startup founders in the most entrepreneurial regions of US (California, New York and Massachusetts) is 40.8.

According to data gathered by Failory, the rate of startup failure differs depending on industry. The most likely to fail are information startups (63%) followed by construction (53%) and manufacturing (51%). Better odds are in the finance, insurance and real estate sectors (42%), education, health and agriculture (44%). The most popular spheres for startups are according to Failory Food and Beverages, e-Commerce, Social Media, Productivity. The least popular are education and design. Usually startups have 11–50 employees, but there are often startups with 1–10 and 51–100 employees, higher numbers are unusual.

Continue reading Part 2, Common features of successful startups

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