90% of Start-Ups Fail…
By: Barbara Cichello Mcalpine
Tags: VC, Leadership, Innovation, Startup, Entrepreneurship

INTRODUCTION

One of the most interesting trends to watch for 2021 and beyond, as noted by McKinsey & Company, is the unprecedented wave of Innovation sparked by the COVID-19 global crisis and the surge of a new Generation of Entrepreneurs that comes with it.

The E-Age (Entrepreneurs Age) is very exciting indeed and brings all sorts of new opportunities, but is also riskier and more competitive than ever because nowadays, in Start-Ups Land, the stakes are very high.

In general terms a Start-Up can be any new business at the early stages of development but, for the purposes of this article, we will use Failory’s definition:

“… a startup is in essence a business experiment with potential. This means that real startups are prone to failure by definition. They are testing assumptions, and it’s very likely these assumptions are wrong. The more innovative the startup, the riskier the assumptions it is testing, the more likely it is to fail.”

“A startup usually has two important characteristics:

Innovation - A startup is testing assumptions that haven’t been tested before - sufficiently new technologies, products & services, or markets.

- A startup is testing assumptions that haven’t been tested before - sufficiently new technologies, products & services, or markets. Growth - A startup has the potential to grow exponentially rather than linearly. It is scalable.This usually happens because technology provides leverage (usually, a marginal cost of production close to 0).”

WHY START-UPS FAIL

The following fascinating statistics from Review 42 shed some light on the failure rates in Start-Ups Land, and should be kept solidly in mind when it seems that all your friends on Facebook have initiated a Start-Up and will celebrate their very own Unicorn in a couple of years or so:

90% of new Start-Ups fail

75% of venture-backed Start-Ups fail

Only 40% of Start-Ups actually turn a profit

In a recent report, CB Insights has reviewed the post-mortems of 101 failed Start-Ups and shortlisted the top 20 reasons ultimately leading to their failure. (Each Start-Up has provided one or more of the reasons listed below.)

So, let’s remind ourselves - the glorious Entrepreneurs Nation - the main reasons leading to failure and explore what can be done to avoid ending up in what Failory poignantly calls the Start-Up Cemetery.

In the next sections we group the Top 20 Reasons Start-Ups Fail in 5 main categories to gather further insights.

CUSTOMER

Customer-related Start-Up failure reasons:

42% - no market need

14% - poor marketing

14% - ignore customers

9% - failed geographical expansion

The primary, and fatal, mistake leading to Start-Up failure is the lack of product-market fit.

This happens when focusing too much on the idea/product and very little on the potential customer. As Investopedia points out “You have to know what your customers want.”

Especially in the digital and software realms, there’s endless appreciation for technology but, at times, very little understanding of customer needs and behaviours.

So we end up with products and services that nobody needs and have no market. For some Founders, developing a solid piece of software and an app is all you have to do to join the fantastic world of flying Unicorns… NOPE.

The most successful Start-Ups are those which have developed products and services that address an unsolved problem or fulfil an unmet need, or find novel solutions to old problems or to inefficient business models, or add value to people’s lives.



The exploration and understanding of the end customer is essential to build (and improve) successful products, services and propositions, to develop compelling and effective marketing plans and to support the expansion in new markets and the acquisition of new audiences.

IDEA/PRODUCT

Idea/Product-related Start-Up failure reasons:

19% - get outcompeted

17% - user un-friendly product

13% - product mistimed

10% - pivot gone badly

7% - failure to pivot

When Founders get too attached to their idea or product they may lose sight of their customers, competitors and all those other business factors that will make or break their potential success.

Moreover, when it comes to bringing Innovation to market, “timing” is key.

The reason is that we live in a world where competition is very intense and given the enormous amount of ideas, talent and funding readily available, as soon as you get a product to market, if it isn’t innovative and relevant enough to quickly gain traction, it risks to be outcompeted by incumbents, or new entrants, with more resources and a similar but better product.

And sometimes, the product is just not good enough, or gets to the market too early or too late.

It’s important to be able to be objective and know when it’s time to pivot and change direction. Start-Ups are “always in beta” hence should “fail fast”, learn and pivot. It’s not unusual to pivot 1 to 2 times.

Founders often have great ideas but, at times, may not know what it takes to bring them to market or make them scalable.

FINANCE

Finance-related Start-Up failure reasons:

29% - ran out of cash

18% - pricing/cost issues

17% - product without a business model

8% - no financing/investor interest

What about the Money? Financial proficiency is one of the key success factors for a Start-Up.

Even when Founders secure funding, they still risk failure if their idea/product has not a sustainable and scalable business model, if the price is not competitive or is not set to cover costs (40% of Start-Ups are not profitable, remember that?), or their spending/investment strategy is not sound.

And even though social media want you to believe that every 12-year-old today can get millions from VCs to fund their mobile app for Virtual Pets, the reality is that VCs fund mainly those businesses that suit their business model.



As per Fundable, only 0.05% of Start-Ups get VC funding and, as mentioned at the start, 75% of VC-backed Start-Ups fail.

Failory explains: “if a startup fund has a portfolio of 100 companies, most of its returns would come from the 1 biggest success (ideally, a unicorn), followed by the 9 successful-but-not-huge companies. The 10 successful startups more than compensate for the 90 failures.”

So, if you do not get funded by VCs don’t take it personally. There are plenty of alternative funding sources, including crowd-sourcing and corporate incubators/ventures, that may better suit your actual needs. If your idea has legs, it will walk anyway.

LEGAL

Legal-related Start-Up failure reasons:

8% - legal challenges

There are plenty of potential legal issues associated with operating a Start-Up (and any other Business).

Founders might get involved in IP or Patent litigations, face oppositions to Trade Mark applications or get “Cease and Desist” notifications for unknowingly (or knowingly) stepping over other Companies’ turf.

They might be exposed to liability issues relating to products or services or employees.

And the list goes on.

It’s not unusual for incumbents in a specific market to use legal challenges as a form of (unfair) competition against new entrants. When joining the Party beware of who is already there.



Legal challenges are often long and expensive affairs and might dramatically affect Start-Ups that rely on limited resources. So, it’s always wise to have a business insurance and expert legal help at hand from the outset.

TEAM

Team-related Start-Up failure reasons:

23% - not the right team

13% - lose focus

13% - disharmony amongst team/investors

9% - lack passion

8% - didn’t use network

8% - burnout

Let’s talk about People. Starting a new Business is not for the faint hearted. It requires hard work, passion, commitment, and a good dose of courage. And despite the fact that it can be exciting and exhilarating, it can take a toll on one’s mental and physical well-being.



To make it through, most definitely, you have to have the right People around. Start-Ups that succeed have Founding Teams that can competently cover all the key areas of business: Business, Technology/Product, Finance, Operations, Marketing, etc. (one person might cover more roles).

Moreover experience is key. Experience speeds up operations, reduces risk and pays off in the long term. A Start-Up should have a healthy mix of younger Team members who bring innovative mindsets, trendsetting ideas, creativity and higher propensity to risk and more experienced ones who bring established industry connections, expertise and a good dose of business wisdom.



When it comes to funding partners, Founders should always choose wisely and look for Investors who share their same vision and values and not only provide financial resources but also expertise and a vast network that will allow the Start-Up to progress faster and further.

CONCLUSION

90% of Start-Ups fail…

But…

It doesn’t have to be like that.

Great new ideas and innovations can be brought to the market successfully but need to be relevant to the end Customer, have a solid Business Model and be supported by the right Team.



Most of all, Start-Ups need to be driven by a compelling Mission.

Those whose aim is to fix a fundamental problem or add value to people’s lives, in the long run, are more likely to succeed.

Sources.

- McKinsey & Company

- Failory

- Review 42

- CB Insights

- Investopedia

- Fundable