Startups emerge with innovative ideas and grand plans, but the journey to success is difficult. The success rate of startups is low, with 11 out of 12 startups failing and more than 7 out of 10 venture-backed startups failing. Only a meager 1% raise over 100 million dollars and even fewer go on to become unicorn firms like Uber and Airbnb.
This article aims to shed light on the question of startup failure by exploring the data and the experiences of successful and failed startups through research curated over the years. You will gain insights into the prevalence of startup failures, the leading causes, and how you can avoid them.
The success rate of startups is often considered to be extremely low, with estimates ranging from 70% to over 90% depending on the industry and country. In a broader ambit, the U.S. Bureau of Labour statistics show that all businesses have a 70% failure rate in a 10-year time frame.
Let’s check out the failure statistics of various startups based on three important factors:
According to the United States Bureau of Labor Statistics, approximately 10% of new businesses fail by the end of their first year and an additional 10% don’t make it to the 2nd year. Overall, nearly 50% of new businesses won't complete 5 years of operation. It must be noted that all new businesses are not startups, and since startups are testing new products or services that haven't been proven before, the percentage of failure is usually much higher.
Coming to the startups, a recent study by Startup Genome shows that nearly 11 out of 12 startups eventually fail. That is almost 92%! These numbers might be detrimental to the morale of entrepreneurs but considering that most of them are jumping into a completely new market with relatively less business experience, this is to be expected.
For the purpose of better data interpretation, we can classify startups as those which have received pre-seed funding. Pre-seed startups usually raise between up to $200,000 within 10 months to kickstart their journey. However,
Only very few startups reach the 30-60 million funding stage of Series B and Series C. Only 1% of this 1% ever go on to reach unicorn status. There is a meager success rate but every entrepreneur will attest to the fact that benefits far outweigh the risk.(Source)
The startup space is extremely dynamic and very few industries or niches can be called evergreen. There is no credible research that shows how many startups failed in a particular niche over the past 10 year period but Statistic Brain Research Institutehas interesting data from all new business from the last four years. It shows that new businesses in traditionally competitive or high-risk, high-reward industries such as Information technology and retail have a higher percentage of failures when compared to more traditional industries such as real estate or agriculture.
However, this data mostly explains traditional industries and established niches. For proper startups, who are disruptive and innovative, it is best to understand what technology and ideas are currently trending in the startup ecosystem. Putting your efforts in a growing niche is important to get faster funding and build a successful startup. For example, AI-based technologies are taking over the startup space in 2013 and if your startup has a good product in this space, it is more probable to get additional funding
Here's research by Startup Genome that found top growing, mature and declining subsectors and niches in the startup space.
The startup ecosystem in the USA, India, UK (and Europe) has been growing and improving in recent years, attracting innovative new companies from around the world. The desire to work for oneself is a driving factor behind the high number of startups while countries like India desire from a huge technically-capable young workforce. According to Startupranking.com, which considers a startup as a “A company with excellent innovation capabilities, advanced technology, and the ability to rapidly grow while preserving its independence over a decade-long lifespan.”, the US has over 70,000 startups, while India has nearly 14,000 and Europe has over 5000 startups.
While startup failure rates across geographies are surprisingly similar, with over 90% startups failing, some countries provide a better environment for entrepreneurs to actually set up their business and thrive.
Here are the top 7 countries for startups, according to CEO World Magazine:
As established already, the chances of a startup succeeding is extremely low and this low rate can be attributed to 3 broad reasons:
About 56% of all Startups say that issues with their product and marketing were the biggest reason for their failure. Their product or service simply did not solve a problem or meet a need that customers had. Some startups failed due to their pricing being too high or costs being too high to generate sufficient profit. Poor product development also contributed to this number.
In the marketing front, most startups blamed their inability to reach their target audience and generate enough demand for their product or service. Some said that they either launched too early resulting in insufficient demand or too late resulting in lost market share.
Many startups blamed their own operations and the market for their startup failure. Startup failures are caused by factors such as bad location, inability to keep up with competition, lack of a clear and effective business model, and ignoring customers. The lack of financing can also pose a major challenge for startups, as a company without investment from angel investors, venture capitalists, or other sources may find it difficult to scale and grow.
A good majority of funded startups fail due to running out of cash, as without sufficient funding they cannot sustain their operations. Legal challenges, such as intellectual property disputes, regulatory hurdles, and liability issues, also factor as issues for startups failing.
A good proportion of startup failures were also attributed to the team working on the product and the founders themselves. Many Founders said that they messed up in hiring the right people for the job. The team's lack of the necessary skills, experience, or cultural fit can result in mismanagement, misunderstandings, and a lack of collaboration. To prevent this, startups can bring on a CTO or technical co-founder to ensure technical expertise.
Startups that do not build relationships with advisors and mentors may miss out on valuable resources and opportunities. Conflicts between team members or investors can lead to disharmony and poor decisions Burnout and loss of motivation among the founder or key team members, as well as a failure to pivot when necessary, can also lead to startup failure.
As we always say, start with a thorough market research of your segment or niche to understand the industry, competitors, and target audience. This is the crucial first step in starting any business and is a continuous process where you are constantly looking for new opportunities and threats. Market Research allows you to stay ahead of competition and increase your chances of success.
Once you have done the research, creating a detailed business plan with clear goals, strategies, vision and mission will help your startup with a predictable and structured growth path. Without a business plan, your startup fails to have a direction to the desired outcomes.
Before going all in, and investing huge amounts of resources, try creating a minimum viable product (MVP) and gathering feedback from real customers. You can understand the effectiveness of your idea in the market at a fraction of the cost, understand customer sentiments and even promote unique value propositions.
Through research and building the business plan, you probably already have a good idea of your target market and their needs and wants. The next step is to build a thorough marketing plan, incorporating all the targeted customers and creating ideal buyers personas. In today’s world, a large portion of marketing efforts should ideally go into digital marketing- whether in the form of content marketing, SEO and paid digital advertising.
As we mentioned previously, nearly 1 in 5 startups blame issues with hiring and teams to be their major reason for failure. You shouldn't make the same mistake. To establish a thriving startup, start by building a competent and motivated team. Next, make sure all resources, whether human, tech or otherwise, are adequately available or can be sourced on demand. Scaling is a period of intense growth and demand, and you don’t want to be left lacking in an aspect.
As with any business, there is a constant threat of small to large scale disruption that can happen to your operation. This might be something completely unexpected like the COVID-19 pandemic or predictable like a recession or even workforce attrition. To minimize the potential risks involved in starting a business, it's important to identify, prioritize, and implement effective strategies to manage or mitigate them. It's essential to have the adaptability to pivot your business strategy when necessary to remain competitive in an ever-changing market.
Loving what you do is a key factor in the success of a startup. Your passion will shine through in your work, and this positive energy will attract customers. Despite challenges and obstacles, maintaining your commitment and sticking to your goals is crucial for success in starting a business. As I said, If something is not working, you can always pivot but never let quitting be your first course of action.
Are you looking for a Technical co-founder for your Startup? Apply today