90% of startups fail: 5 reasons for startup slip-ups and how to avoid them
Most likely, you’ve heard of this terrifying statistic before: 90% of startups fail, and 20% of them do not survive the first year. But instead of letting these numbers scare you when starting a business, make them work for you.
Why do so many new businesses fail, what are the most common reasons, and are there any tricks that can help you avoid this? Let’s dive deeper to answer these questions in the article.
CB Insights’ market intelligence platform defined 12 reasons why most startups fail. They have been researching startup slip-ups since 2018, constantly updating their list.
Let’s focus on 5 startup failure reasons (with real-life examples) — those you can forecast and prevent with a proper strategy:
- Lack of product-market fit
- Wrong team
- Poor marketing planning
- Bad launch timing
- Unbalanced competition
Before you start, note that successful entrepreneurs are not those who never failed, but those who picked themselves back up and carried on.
#1 — Lack of product-market fit
The issue: According to CB Insights, 35% of companies fail because they launch a product the market does not need. Entrepreneurs tend to be blinded by their ideas, especially if they believe they are ahead of time. But the market might not be ready for innovative products, or not relevant to the audience. There are also cases when the supply drastically overweights demand. The existing products or services satisfy customer needs, so the new ones fail to stick to the market.
The “don’t do this” example: The Vreal platform wanted to create a virtual reality space where video game streamers can hang out with viewers. Yet, the VR market failed to develop as quickly as the platform’s founders expected.
The fix: Conduct research. Market and competitor research will help you understand how many players there are, the market volume (how much money there is), and niches with high demand and little supply. Customer research will give you a better understanding of a potential target audience. And qualitative research, like 1:1 interviews, will help improve the product and make it more valuable for your target audience.
#2 — Wrong team
The issue: 14% of startup failures happen due to the skill sets of a team. In some cases, the business founders do not have enough experience (hence, expertise) in the industry they start a company in. Sometimes, startups struggle with managing people and processes, or the technical implementation of their ideas. Lack of trust in a team is also a bad sign for the new business.
The “don’t do this” example: One of the reasons e-commerce apparel startup Quincy’s failed was because neither of its founders had previous experience in clothing manufacturing. This led to hiring the wrong people and operational problems.
I learned that you could fail for many different reasons — in our case, it wasn’t because we weren’t creating a product people wanted. That’s product/market fit. I think we had that. We struggled with product/operational fit. Our production and operational processes were too complex to succeed with the tight turnaround times, small-batch manufacturing, and thinner margins associated with our business model.Christina Wallace, the founder of Quincy
The fix: The problems should define the solutions. If you’re a talented jewelry designer but a not-so-great salesman, maybe you need to find a partner with required skill sets. Networking is a perfect option for you. If you feel like you could use better marketing or people management for your business, hire professionals. Delegate what you’re not good at. Also, try to be as transparent with your employees as possible to avoid trust issues inside the team.
#3 — Poor marketing planning
The issue: There are two opposite sides to this problem. Some businesses underestimate the importance of marketing, thinking that a good product will sell itself. Other startups try to cover too many marketing channels, believing that the more exposure, the better. Instead of building meaningful and engaging relationships with their audience on a few channels, they spread resources too thin.
The “don’t do this” example: A habit-tracking app called Habitual failed because its launch wasn’t backed up with a solid marketing strategy.
I think many programmers are under the assumption that if the product is good, it’ll spread by itself… After launching on Product Hunt, I didn’t really have much of a marketing strategy, so the app was kind of left dead in the water from there.Holger Sindbaek, the founder of Habitual
The fix: Even if your product or service is a real innovation, how would people know about it without good promotion? Marketing is essential to reach your potential audience.
Use the Bullseye Framework: start with 20 possible marketing channels, such as SEO, SMM, email marketing, PR, community building, and more. Then, zoom in: choose 3-5 tools that will bring the most value to your business. After 3-6 months of testing your strategy, adjust it for your company. Maybe, two channels are more than enough for you, and the rest are just a waste of time and money.
#4 — Bad launch timing
The issue: Timing is crucial when launching a new product or service. If you do this too early, customers will have a wrong first impression when the product is not good enough. And it will be a challenge to bring them back. If you wait too long, your competitors might occupy a niche with a similar idea. Besides, there are external factors nobody can control. Think of the pandemic! Obviously, launching a travel agency or new restaurant during quarantine is a failure from the start.
The “don’t do this” example: This is what happened to HubHaus, a long-term housing rental for working professionals in cities.
Similar to everyone else, in the middle of March, we saw 40% of our revenue disappear in a matter of five days. By the middle of June, 60% of people had left, which was not enough for us to cover obligations.Clara Arroyave, the founder PlaceMe, the co-living startup
The fix: Make flexibility a part of your business plan. Entrepreneurs need to be ready to change course if the situation requires this. Leverage the If-Then statements methodology to develop backup plans and predict problems your business might face. Having a delivery is an example of a backup plan for a restaurant if another pandemic wave hits the world.
#5 — Unbalanced competition
The issue: There are bigger companies with the exact same product or service, or new businesses that replicate your idea; either way, competition can lead to startup failure. Balance is crucial here: a total lack of competition might signify no market need. At the same time, too many competitors might simply force out new business with more resources and a better understanding of the industry.
The “don’t do this” example: Children’s apparel delivery service Mac & Mia wasn’t able to compete with big companies in the same industry:
Mac & Mia faced a host of competitors in the children’s delivery box space, including the aforementioned Stitch Fix, which launched its kids’ clothing service in 2018. Stitch Fix went public in 2017 and has a market cap of around $2.7 billion. At least 20 other upstarts have launched similar delivery services for children’s clothes.
The fix: And again, conduct competitor research. You need to understand the market before starting a business. That’s the only way to see how competitive it is. Make a list of the most prominent players on the market and gather information about them. One of the methodologies for this is acting as their customer. Sign up for their email subscriptions, try to make an order, and download their app if they have one. By doing this, you’ll see what can be improved in the process: this can inspire you to find the niche for your product.
Failure is a part of entrepreneurship; it’ll teach you better than any Harvard class. In fact, 67% of business founders who face failure start a new startup.
Yet, if you better understand why startups fail and learn how to deal with these issues, it can help you avoid common mistakes.
Here are some more ideas if you want to further explore the topic of startup failures:
- Explore more failure and success stories on Failory to learn from the mistakes of others, as well as get some inspiration and tips from business owners.
- Read books on the topic: “Why startups fail” and “Lean Startup” by Eric Ries, “The fail-safe startup” by Tom Eisenmann.
- Get inspired by successful entrepreneurs: what do they do differently? There are so many podcasts, YouTube videos, and articles with interviews; choose the one you like and note some ideas for your business.
Stay tuned for more inspirational articles on business, marketing, and design!