Top reasons why startups fail and what to do about it

Entrepreneur failing in a startup.

Based on 101 interviews with startup owners, CB Insights has listed and described the top 20 reasons why startups fail.

Reason #1 – There is No market Need

Trying to tackle challenges that are interesting to solve, rather than meeting consumer and market needs, was cited as the No. 1 cause for failure, as noted in 42 % of the interviewed.

Many startups met death before they had started because they thought to develop a product that no one ever wants or needs. They try to give it a go-to to build something without ever placing the definition or idea to the test in the real world.

Undoubtedly, the most widely discussed lesson, by far, was that you ought to verify whether the market needs what you propose. Ideally, it would help if you did this before spending a substantial amount of money, time, or cash on the idea.

What to do about it?

Create a Prototype, a Proof of Concept, or an MVP (Minimum Value Product), and get it out to validate the market as soon as you can.

Reason #2 – Run Out of money

The financial challenges, which have sunk 29 % of startups, are not due to the lack of investment but mainly from lack of profitability.

Consequently, the inability to sell the product profitably leads to a loss of investor interest and management issues.

Over-hiring too early is usually a significant risk and could quickly destroy an otherwise very successful company.

What to do about it?

Underspending and cash flow are the two most important financial aspects you need to keep in mind, particularly when you start making money.

Early in the company’s life, it’s necessary to keep operating costs as minimal as possible (founder living costs + minimum operational costs).

It would be best if you outsourced whatever else you need (freelancers, agencies, consultants).

This gives you the advantage of reducing expenses almost immediately if you quickly encounter a roadblock.

And by doing so, you’ll be able to keep your company alive, leaving you the time to fix your problems.

Money and investments must both be carefully controlled, regulated, and managed using a sustainable business model, find that model.

Reason #3 – Problems with the Team 

Often it will happen that no matter how much experience a team member has, they’re not up for a particular project.

Startups need people who are startup-savvy. Or they may lack any critical consistency to make the project a success. The more acute the project goes, the sharper it sounds.

However, lack of experience usually means different things:

  1. Lack of basic knowledge in your domain: you need to know your market.
  2. Lack of knowledge in marketing: how to meet your clients, keep them interested, how to expand your company. It’s a prevalent cause of failure on tech-only owner teams. A strong marketer is utterly crucial for a startup, and one of the most important founders needs
  3. Lack of technical expertise: if you have a technical product, you need a strong technical team. If you don’t, you won’t be able to create a quality product. That said, it’s essential to keep the tech side as lean and agile as possible early in the life of a startup.
  4. Lack of management and business knowledge: Poor business/startup decisions will potentially overrun all your attempts to be successful and kill your company.

Finding a well-balanced team is the secret to a successful startup.

Nonetheless, remote work policies created brand new challenges for both employees and employers. Knowing how to manage, empower and create remote teams is game-changing in today’s dynamic markets.

Resources and tools for a variety of skill sets are crucial for building a successful startup.

The right team is not made up of perfect and knowledgeable people, but rather about people sharing talents and alleviating each other’s flaws and weaknesses.

What to do about it?

If you don’t know your market very well, then speak to prospective customers before building anything.

Educate yourself first. Create a small proof of concept to test the waters. Then, when you feel more confident, go for an MVP.

Get Marketing early on in the company; If you’re the company’s King, Marketing is your Queen.

If you lack management skills, hire a consultant or learn about other people’s experiences from articles like the one you’re reading.

Reason 4# – Competitors

With all the fuzz that happens in early startups, how are you supposed to pay attention to the competitors?

Worst, as your product matures, there will be several competitors ranking up your space. Avoiding acknowledging the competition was also a prescription for failure in 19 % of startups.

Usually, business owners do not think about monitoring competitors as long as they feel that their strategy and individuality would separate them from the crowd. Would you enter into an infested shark tank just because you want to be a shark too?

What to do about it?

Monitoring your competitors will make your company successful.

Put tools in place to monitor them, how they work online, what are their pros and cons, do your research and make it a habit.

In some instances, rivals can also become allies if the strategies match.

Reason 5# – Pricing

18% of the companies stated that they were unable to price their products correctly. Therefore, they failed to become profitable.

What to do about it?

Your price should be neither too low nor too high; it must reflect the value of your product. It’s supposed to be right and fair so that your consumers and clients are willing to accept it

But, how do you know which price is best?

Experiment and research the market. First, you need to check what the rivals are doing. You will measure your expenses to provide a product that will offset your costs and then, if possible, make some money for you.

That’s why you must be as cost-efficient as possible.

It would be best if you fine-tuned your pricing strategy. Chan Kim and Renée Mauborgne in Blue Ocean Strategy have a specific section on pricing your product correctly. Please read it.

Reason 6# – Unfriendly product

Implementing a user-unfriendly app is a sure bet for failure for every entrepreneur. A confusing UX (User Experience) or CX (Customer Experience) can cause the startup to fail.

It usually occurs when entrepreneurs skip the UI/UX design stage to reduce costs.

Even when using Agile methodologies, you need to design first to prevent a scenario that destroys the product’s appeal and desire.

What to do about it?

It would be best to think about design from day one, create prototypes, test, retest, and hire professionals to help you out.

Then create an MVP. But don’t go too far to cut off critical functions.

Reason 7# – Product without a business model

Most failed entrepreneurs believe that a business model is necessary.

They also thought it was simple to create a product, service, or website and attract consumers.

It is not that straightforward to do without an appropriate business model.

What to do about it?

Think first about your monetization strategy; how will you earn money to survive?

Is it your plan to get funded? Then investors want to know about your Business Model and how you’ll be profitable. Yes, you need to be profitable.

Reason 8# – Bad Marketing

Learning the target market and knowing how to attract audience attention and turn them into leads and eventually a client is one of the most valuable skills of a successful company. 

Around the same time, it is often typical for goods that meet the market to ignore effective marketing. Businesses either deliver their products in a manner that doesn’t reach an audience or don’t realize what people want and promote the wrong features.

What to do about it?

The most important thing to remember is that no matter what industry you’re in, whether it’s flower distribution or super tech, VR/AR set, you’re still in the marketing business. The quicker you understand that, the better your chances of success.

Reason 9# – Ignored costumers

Ignoring customers is a proven and right way to startup failure. Tunnel vision and not gathering customer reviews are critical mistakes for most tech startups.

If the product/service is exciting and bright, it will draw visitors. But unless it delivers actual benefit (problem-solving), you’re going to lose your customers right away – your campaign resources are just being wasted.

Consumers purchase goods as they deliver such advantages and are intended to do so. Other users also verify if the software is user-friendly. When they discover certain items that are user-unfriendly, they don’t care twice about not buying them. Therefore, when making goods for your startup, make sure they are user-friendly, have rewards, and solve their problems.

What to do about it?

You need to ensure the user experience is excellent and straightforward. You need to test your products with a few people in your industry: the best is to make your product tested by people you networked with.

Reason 10# – Product mistimed

If you release your product early, users may write it off as not great enough. Bringing it back may be challenging if their first impression of you is negative. And if you deliver your product too late, you might have missed your business growth window.

The incorrect time to sell your services or goods might only lead you to lose your investment. For example, if your business is a fashion line and sells winter clothing for a hot summer season, predict your target buyers to avoid you.

What to do about it?

Startup owners should note that timing will make a difference in selling their goods and services.

No matter how inexpensive the winter clothes are, they’re not going to buy them because people are looking for something that matches their summer goals. This may seem like a ridiculous example, and you’re probably wondering who will do that. Still, it is likely happening with you. Bad timing is going to take you nowhere but disaster. So, calculate the right time to go to the market, and you’ll see the difference.

Reason 11# – Lack of focus

Getting sidetracked by disruptive tasks, personal matters, or general lack of attention was listed in 13 % of stories contributing to failure. 

Startups that have not been able to survive long in the market are those that personal matters, distracted by campaigns, have sidetracked and experienced a general lack of attention.

What to do about it?

Start your business with market research, so you don’t lose control of what you’re doing. Via good research in advance and with the right plan set in motion, you’re not going to lose concentration on what can be done next. Now you’re going to focus on the most critical tasks and stop doing things to keep your company moving forward.

Reason 12# – Disharmony among Team and Investors

The team dynamics are destroying seed-stage businesses with several founders. The pressure to start up can be too great for specific relationships. Founders ought to ensure good relations with each other to prevent quarrels and misunderstandings.

What to do about it?

Don’t hesitate to work with your team. Make sure everybody knows what it’s all about. The majority of team members can adjust with time, and it’s natural if they wish to leave on their own or are laid off for various reasons. Just make sure that new members recognise and focus on the main objectives of the business.

Even if you use the perks of expanded teams, as many other startup founders do today, it’s always crucial to match your team with the key goals. In today’s world economy, the bulk of startup teams is divided.

Reason 13# – Pivot went bad

Pivots may go exceptionally well or can go entirely wrong, leading to a startup disaster. It is vital that stock is taken from time to time and that the adjustments are made accordingly.

The organisations that can be competitive in the long term are the ones that can adapt to the dynamism of the economy. Although, the right time and direction of those changes are tough to identify. The great entrepreneurs are the ones that can smell those signs.

What to do about it?

It is essential to mitigate the risks and extensively evaluate the changes both in the business and technology side when pivoting. Get advised by experts and conduct cheap tests to ensure you are shifting in the right direction.

Avoid some low-code/no-code software traps. Technical legacy is one of the most common reasons why startups fail to adapt to the market. Some platforms might seem the best option for building cheap software at a first glance. Although, on the road, it might be a barrier when thinking about scaling or pivoting because your software might get stuck to the functionalities that are pre-defined by the system.

Reason 14# – Lack of passion 

There are plenty of promising ideas globally, but 9 per cent of the post-mortem startup founders find that a lack of enthusiasm for the domain and a lack of understanding of the domain are primary causes for failure, no matter how good the idea is.

The grind is setting in. The ideal is replaced by truth. This dilemma emerges primarily when an entrepreneur does not realise what their inspiration is and why they have founded a business.

What to do about it?

Evaluate the real reason you’re driving. To successfully overcome the crisis, you should have a good idea of why you’re doing what you’re doing: becoming wealthy, creating and selling a brand, changing the world, and leaving a mark. But note, even though you’re hoping to sell it, be mindful that you should only sell a company that runs well.

Reason 15# – Failed geographical expansion

Location was a matter in some different aspects. The first was that there must be a correlation between your startup’s idea and the venue.

The location also played an important role in remote team failures. If your team works remotely, make sure you follow successful communication methods, or a lack of coordination and preparation can lead to startup failure.

There is no perfect definition of a poor location. It relies on what you are offering to your target customers. The most significant advantage to being well located is communicating with your audience and knowing the surroundings in which they are located. Suppose you’re a Silicon Valley or London company, but your target audience is South Korea or Thailand. In that case, you might have significant trouble knowing your target and their needs.

What to do about it?

If you want your startup to succeed, you need to do your best to find the right place for it. Apart from scheduling and providing a revenue model, the correct location is also a significant consideration. Remember, your position will either destroy or help your startup flourish. If you don’t want to lose, pick a place to help you meet your future clients or investors.

Reason 16# – No financing/investor interest

Tying with the more popular excuse to run out of funds, several startup entrepreneurs have cited a lack of investor involvement at the seed follow-on stage.

What to do about it?

Plan your cashflows considering the most optimistic and the most pessimistic scenarios. Financial sheets are vital to ensure you don’t run out of cash. At the same time, elaborated financial forecasts, technical documentation and a great product pitch gave investors the confidence to invest in your business. Make sure you know how to prepare those or get specialised advice on striving in those materials.

Reason 17# – Legal Problems

Innovations can be inspiring, but if the enthusiasm is enough to make an entrepreneur miss the legal brainstorm, it’s no less than gasoline – and ultimately, it’s the chance to burn the company up.

There are a few dimensions to evaluate the legal issues. 8 % of American startups are chained because they do not pay proper attention to their legal obligations.

What to do about it?

Though we can’t list all of them as they vary from business to business, we’ll list the eight most popular ones faced by most of them:

  • The inappropriate legal structure of the startup
  • Not having a founder’s agreement
  • Absence of proper licenses
  • Ignoring tax laws
  • Shares sold improperly
  • The privacy policy of the business website is defined loosely
  • Not legalising IP assets (Intellectual Properties)
  • Legal negligence of employee contracts

Reason 18# – Network problems

We always hear startup founders expressing regret about their lack of network or investor relations. Still, it’s shocking to find that one of the causes of failure was that entrepreneurs mentioned they weren’t using their network correctly.

Networking is a vital part of communications and marketing strategies in big companies. For entrepreneurs, having no networking would take you to a failure path. Networking is valuable. It will help you communicate with others you might end up with as future investors or customers. You may also get in touch with other entrepreneurs who could become investors, co-founders, advisors, or friends who can support you when you need them. 

What to do about it?

Relationships are taking time to build. After one date, most people don’t get married. So, successful partnerships are “lines, not dots.” Cultivate a social mentality and build a robust entrepreneurial ecosystem around you and your business.

Join innovators’ communities. Meetup.com is a great app to find the best events on the topic you choose and meet the people you want surrounding you.

Reason 19# – Burn Out

Work-life harmony is not something that startup entrepreneurs always get because there is a strong chance of burning out. Burnout was given 8 per cent of the time as an explanation for the failure.

When people immerse themselves in the company issues and daily operations, they lose the ability to see the complete picture. Acquiring diverse knowledge, communicating with different people and putting your head out of the company might help you see the whole dimension.

The anxiety caused by micromanaging is also strongly related to this threat. Create a robust, diverse, and motivated team where trust is king.

What to do about it?

Many people say that you can keep hustling and have 100-hour work weeks while an entrepreneur. You may have that amount of overtime for a few weeks, but you shouldn’t work so many hours each week. Your success would be lower and pressure higher if you don’t have enough sleep, don’t exercise, or don’t communicate. You can do everything you can to avoid starting depression and burnout. Working 10 hours at 100% of your efficiency is healthier than 20 hours at 20% productivity.

Learn how to delegate work and promote a trust mentality in the organisation. Hire people that align with your strategy and that share your goals.

Remember, growing a business is not a sprint. It is a marathon.

Reason 20# – Problems with pivoting

In startups, particularly tech ones, there are always two opposite principles that need to be held in mind:

  • Intense focus.
  • Ability to pivot.

The most challenging thing is to do them simultaneously without losing concentration. It is necessary to identify the main aim of your project, not to get distracted by secondary functions, and deliver what you pledged to your customers and investors.

On the other side, it’s not unusual for startups to completely re-start new projects because the central idea almost constantly evolves in unexpected directions, changed by industry realities. 

Suppose that some of the secondary functions of your product tend to be more beneficial for the audience than the main one. In that case, it may be wise to emphasise those functions strictly. For example, the Inboard Technology group, which started as a Kickstarter project promising electric skateboards, failed in the electric scooters pivot.

What to do about it?

Make sure you have a business plan that emphasises the reasons behind the pivot and that you extensively understand the consequences of pivoting.

Keep an evolutionary mentality in your product development and promote cyclical development methodologies. Evaluate constantly the pivot opportunities that are available in your niche.

Trust on data and avoid wishful thinking. In his book Hacking Growth, Sean Ellis suggested that as an aeroplane needs instruments to fly, your business without the proper data ecosystem is “flying blind”.

Common Lessons

Startups were asked, “What can you do better,” even though there are a lot of point lessons to be learned. The results were the following:

  • Validation – speak to your clients, check your hypotheses, identify a niche and choose the right partners before spending substantial time, energy, and resources on an idea. 
  • MVPdevelop your MVP as quickly and as cheaply as possible. Iterate a lot. 
    Not unexpectedly. The Lean Startup Book is one of the most often listed resources.
  • Risk – Start-ups are very risky. Investors diversify by funding several startups, but you don’t have the option as an owner. This means you are very, very prone to failure. Make sure you can bear this loss physically, mentally, etc. E.g., investing in a startup idea with a loan is a bad idea.

TechRivo specialists can provide you with guidance on those for free. Just schedule a meeting.