Top 5 Reasons Startups Fail According to Venture Capital Research Firm, CB Insights
Starting a #smallbusiness can be a very complicated and challenging task
It's no secret that starting a small business and being able to run it successfully is no easy task. Most people fail at this. The Small Business Administration estimates that out of every 10 businesses started, only three will remain after the first year. That success rate diminishes even further at year 2, 3, and 5.
Truth is, different businesses fail for very different reasons, from lack of funding to intense competition. Any marketplace can be treacherous, and having the right, almost serendipitous mix of optimal circumstances is required for companies to thrive.
Based on the results of a survey of 101 businesses conducted by CB Insights, these are the top 5 reasons why Small Businesses Fail.
#1: No market need
Tackling problems that are interesting to solve rather than those that serve a market need was cited as the No. 1 reason for failure, noted in 42% of cases.
As Patient Communicator wrote,
“I realized, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office.”
Treehouse Logic applied the concept more broadly in their post-mortem, writing,
“Startups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behavior, great reputation as a though leader, great expertise, great advisors, etc, but what we didn’t have was technology or business model that solved a pain point in a scalable way.”
#2: Ran out of cash
Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by startups (29%).
As the team at Flud exemplified, running out of cash was often tied to other reasons for startup failure including failure to find product-market fit and failed pivots,
“In fact what eventually killed Flud was that the company wasn’t able to raise this additional funding. Despite multiple approaches and incarnations in pursuit of the ever elusive productmarket fit (and monetization), Flud eventually ran out of money — and a runway.”
#3: Not the right team
A diverse team with different skill sets was often cited as being critical to the success of a company. Failure post-mortems often lamented that “I wish we had a CTO from the start,” or wished that the startup had “a founder that loved the business aspect of things.”
Standout Jobs wrote in their post-mortem,
“…The founding team couldn’t build an MVP on its own. That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t.”
In some cases, the founding team wished they had more checks and balances. As Nouncer’s founder wrote, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.”
#4: Get outcompeted
Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space. And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 19% of the startup failures.
Mark Hedland of Wesabe talked about this in his post-mortem stating:
“Between the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly. Everything I’ve mentioned — not being dependent on a single source provider, preserving users’ privacy, helping users actually make positive change in their financial lives — all of those things are great, rational reasons to pursue what we pursued. But none of them matter if the product is harder to use.”
#5: Pricing / Cost issues
Pricing is a dark art when it comes to startup success, and startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers.
Delight IO saw this struggle in multiple ways, writing,
“Our most expensive monthly plan was US$300. Customers who churned never complained about the price. We just didn’t deliver up to their expectation. We originally priced by the number of recording credits. Since our customers had no control on the length of the recordings, most of them were very cautious on using up the credits. Plans based on the accumulated duration of recordings make much more sense for us and the number of subscription showed.”