Why do most startups fail? The 3 main reasons.

In the long run, only 1 out of 10 startups survives according to a study by Investopedia (2020). This number might seem shockingly low, but there are many reasons why startups fail. Curious about the most dangerous causes of these failures? Keep reading.

Lack of product fit

“The number 1 reason by far why startups fail, is the common misconception that there is a need for the product or service that someone wants to offer”. This misconception is also called no market need for the product, or lack of product fit. About 42% of the startups fail because of this (CBinsights, 2019). What often happens is that entrepreneurs haven’t really validated their ideas, and it is often forgotten about. Usually, startup founders do a lot of desk research, however, real life validation is needed. So, how should you do this research instead? You can read more about this in this article. In short: awareness amongst startup founders is key. why startups fail. 

Running out of cash

If your startup doesn’t face the problem discussed above, then congratulations, you have a significantly higher chance of survival. However, next up is the following problem: running out of cash. The runway’s for startups (the time that you can last with the funds that you have) are often overestimated. In other words, founders don’t start in time with raising money, and when they do, they often don’t raise enough. Guess what? On average, it takes 1 person who is working full time, at least half a year to raise enough money, and that is in silicon valley… Certainly, raising money is hard, but founders simply underestimate how difficult it can be, especially at an early stage.

The team is not right

Finally, the last reason why startups fail, and 3rd most prominent, is not having the right team. Besides focussing on individual personalities, it is also important to have people who take on different roles within the team: there should be someone who has the vision, be the face & run the company. Besides that, there should be a commercial person who takes on the sales, and someone who is responsible for the product or service itself. Moreover, keep in mind that in the early stages of your startup, investors tend to look at the team more than the product sometimes. In terms of individual qualities, there should be a willingness to take calculated risks within the team (except for the CFO). 

There are some signs that your team is not working properly, or that it is incomplete: the main give-away here is when teams do not communicate: it often happens that different (co-)founders have different visions, different levels of commitment, and different expectations from each other. It might be that one of the startup founders wants to work 60 hours a week, and wants the startup to have a huge positive impact on society, while the other founder wants to work a regular 40 hour week and simply wants to make enough money to come by. If not talked about, these differences may lead to frustrations and arguments, which will have a bad effect on the startups’ success.

Conclusion

To conclude, Most of the time, it will take about 3 years before startups fail. 9/10 Startups will fail eventually, and it is best to cut your losses as soon as possible. It’s good to have a lot of hope and aspirations, but holding on to dead ideas is very bad for you. Sometimes, the smartest thing to do is to quit early and start with a new idea. Interested in how a mentor can increase your chances of survival? You can find it in this article.