Some Factors predicting Startup Failure revealed by a study. Majority of startups eventually fail and the pervading myth is that between 80 & 90% of startups fail within the 1st few years — and, in reality, it is not quite that bad.
For instance, the Bureau of Labor Statistics claims about 50 % of new businesses survive five years or more, with 33 % surviving 10 years or more. A Harvard Business School study found that 75 % of VC-backed startups studied eventually failed.
To passionate entrepreneur, these stats are intimidating, but they’re ultimately meaningless; if you believe in your idea, you will believe yourself to be in the percentage of succeeding businesses, and you will ignore the failure statistics because you would not believe they apply to you.
But what is important here is not the sheer number of businesses that fail; it is the info we can glean on why they failed, & how those failures are to be prevented. A study done by CB Insights that the venture capital database, delved into these motivations, seeking to explain majority of startup failures. Here I am to share the highlights of the study:
Debuting back in 2014, CB Insights started its study through reading in detail, the post-mortem statements of fifty entrepreneurs whose startup ventures had failed. After several years & several updates (the recent coming out last October), the study comprises 242 individual post-mortem letters, each detailing reasons behind the startup’s failure.
The Top Factors
So what were those factors behind startup failure? They represented all instances of the startup failure, starting with most popular and descending towards least popular:
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No market requirement: A whopping 42% of post-mortem letters admitted a lack of market need in some way contributed to those enterpreneurs’ demise.
Inappropriate team: Team is the driving force to turn your vision into reality. If these employees do not have the experience, the passion or problem-solving skills to execute & improve on your idea, you are dead in the water, like the 23 % of startups that referenced team issues as an ingredient in failure.
Bad core product: About 17 % of companies admitted their product was not good enough to make company succeed. Without strong product, it is virtually impossible to grow.
Bad timing: When good ideas come early, market may not be ready to buy. When they come much late, market is saturated. Roughly 13 % of companies claimed this as primary reason for failure.
Intra-team conflicts: Infighting is not good for any organization, especially when it is among high-ranking team members, or the worse, partners & investors. About 13 % of failed companies cited this as reason.
Lack of passion: In case you try to build business without really being passionate, you are much less likely succeed, like the 9 % of companies that claimed lack of passion as main reason for failure.
Bad location: Meetro is one of the 9 % of companies that cited a bad location as a reason for their failure; the startup worked perfectly in Chicago, but couldn’t expand to other urban areas because it failed to grab the attention of those residents.
Lack of financing or investor activity: Like lack of cash, lack of initial investor interest caused 8% of startups in study to fail prematurely.
Legal hurdles: Whether it was being sued, navigating legal disputes or trying to establish legal operation, 8 % of startups succumbed to the challenging legal hurdles.
Lack of advisors or network: You do not need a mentor to build business, but it helps to get that outside expertise; 8 % of startups admitted to not having a network, & not having advisors to help guide them in decision-making.
Failure to pivot: Though pivoting incorrectly could lead to the failure, not pivoting at all can be as bad, with 7 % of failed startup entrepreneurs wishing to have pivoted when they needed to.
Above are not the only ways your startup could fail, but they are the most common ways according to data. If you could manage to avoid them (and one help may be reading my book) you will improve your chances of eventual success — and surely avoid failure.