Why Learning About Startup Failure is Critical to Startup Success

If you’re thinking of starting a startup or you’re already a startup founder, then you’re this post will help you discover why learning about startup failure is critical to startup success.

You’ll become informed and find out:

  • Why you should be aware about startup failure
  • How startup failure can affect you
  • Why startup failure occurs and the top reasons
  • About startup failure in the United States and worldwide

 

Why You Should Be Aware About Startup Failure

startup success rate and startup failure rateAwareness is the first step for startup founders on the journey towards success and it’s widely documented online that there’s a 90% startup failure rate. However, there is some debate about what the number really is.

Regardless of the startup failure rate, it’s important for you to understand the situations that can occur before starting your own journey because then you can have the knowledge to make better business decisions and avoid potentially bad decisions.

Moreover, between 70% and 75% of venture capital-backed startups fail, as per the Harvard Business Review and CB Insights.

Jessica Livingston, a Partner and Founder at Y-Combinator, which is the first and most successful startup accelerator, said: “If you can learn what mistakes to avoid [from] other founders [who] say, ‘don’t spend your time doing this,’ then why not learn from those [mistakes]?”

I whole-heartedly agree. Knowledge is power and it saves you time and money when you can avoid the costly mistakes that cause startup failure.

 

How Can Startup Failure Affect You?

Millions of startups worldwide launch each year and there are major deficiencies in the learning process, how to start a startup the right way, and then in running a startup the right way.

Too many founders are making the wrong decisions and it’s costing them their teams, their families, and their livelihood.

Your life and livelihood is more important than a startup idea that will not work.

So if you’re going to start a startup, then you ought to know the risks of starting one and why they fail.

And if you’re devoting your life to your startup, then you’re going to want to make the right decisions that will make your startup run smoothly and create sustainable profit.

Right?

And when you can learn from other people’s past mistakes, then you’re setting yourself and your startup up for success.

Therefore, by educating yourself and investing in your learning and development, then you’re much more likely achieve startup success.

However, without being venture capital-funded, you have between a 10% to 20% probability that your startup will be successful. If you are VC-funded, then you have a 25% to 30% chance of success.

Not trying to be a “Debbie downer” here, but without educating yourself about startup failure, the odds are stacked against you whether you’re VC-funded or not because it’s statistically probable that your startup will end up in the startup graveyard.

 

Why Startup Failure Occurs

Below, you can see the chart of the top 20 reasons for startup failure by CB Insights.

You’ll also notice that adding up the percentage of all reasons does not equal 100%. That’s because founders who participated in the study were provided a survey of sorts where they were able to check off multiple reasons which contributed to startup failure.

startup failure - the top 20 reasons why startups fail from cb insights. 1) No Market Need (42%) 2) Ran Out Of Cash (29%) 3) Not the Right Team (23%) 4) Got Outcompeted (19%) 5) Pricing/Cost Issues (18%) 6) Poor Product (17%) 7) Need/Lack a Business Model (17%) 8) Poor Marketing (14%) 9) Ignored Customers (14%) 10) Product Mis-Timed (13%) 11) Lose Focus (13%) 12) Disharmony on Team/Investors (13%) 13) Pivot Gone Bad (10%) 14) Lack Passion (9%) 15) Bad Location (9%) 16) No Financing/Investor Interest (8%) 17) Legal Challenges (8%) 18) Don’t Use Network/Advisors (8%) 19) Burn Out (8%) 20) Failure to Pivot (7%)

The CB Insights study provides insight into the mistakes that caused startup failure and includes personal viewpoints from the ex-founders as well as short anecdotes from the staff from CB Insights on their website.

The PDF report from the study is only ten pages long and their website has nearly all of the stories from the founders who participated.

While stories are good for insight, they don’t give you a structured and in-depth analysis of  root causes why startups really failed with. Nor are there detailed explanations of what could have been done to prevent those blunders from occurring.

That’s why I’ve been writing a book called Startup Survival Secrets, where I explain the root causes for every reason in the CB Insights study, how to prevent them, and what to do instead.

The goal of Startup Survival Secrets is to educate, give startup and life advice, provide helpful resources for some of the root cause analyses, give you common-sense solutions, uplift you, and inspire you so that you can build an amazing startup with less stress while saving time and money which would have otherwise been wasted.  In addition, I provide some stories and real life examples to help emphasize some of the root causes you’ll discover.

 

Some Common Ways Startups Have Failed

Most people would agree that a business that had to close down because they couldn’t make ends meet, is a failed business.

That’s true, but in fact, there’s much more to it that doesn’t necessarily have to do with money.

Here are some other root causes to failure:

  • Startups that couldn’t launch
  • Startups never did a competitive analysis and market research to gain understanding of their niche’s landscape
  • Startups that never performed their due diligence with founders and other teammates to find that their team was the wrong fit
  • Startups that launched but couldn’t get any customers
  • Startups that got customers but couldn’t retain them and quit too early
  • Startups that got out-witted and outcompeted due to a lack of differentiators and trust

There are many more reasons why startups fail, and if or when you read Startup Survival Secrets, you’ll learn over 80 root causes for startup failure.

Now to help you understand the magnitude of and wide-spread problem of startup failure, I’m going to talk about the startup failure statistics.

 

About Startup Failure in the United States and Worldwide

The United States has its own data, but the data set for the U.S. is definitely far from complete.

According to the U.S. Small Business Administration in its frequently asked questions section, “About half of all new establishments survive five years or more and about one-third survive 10 years or more. As one would expect, the probability of survival increases with a firm’s age. Survival rates have changed little over time.”

In the United States alone, according to the Bureau of Labor Statistics, every year, approximately 525,000 businesses launch on average, and as of 2015’s latest numbers, the amount of new businesses launched nationwide were 675,000.

Although when you apply the 90% failure rate metric towards the average amount of new businesses that start up each year, then we can extrapolate that approximately 495,000 startups and entrepreneurs go out of business in the United States each year.

Wow.

However, the Kauffman Index of Startup Activity cites that approximately 540,000 U.S. workers switched into self-employed status per month in 2016.

And when you apply the 90% startup failure rate to the Kauffman Index report’s numbers, then 5,832,000 business fail a year in the United States.

Holy crap. Seriously. How insane is that?

And we aren’t even talking about the rest of the world because it’s even more difficult to gather comprehensive data globally. Moreover, startup failure rates could be higher in some countries or lower in others due to infrastructure and economic opportunities.

 

Startup Industry Influencers’ Opinions on Startup Failure

Neil Patel is widely respected and considered the #1 marketer in the world and the founder of four multi-million dollar startups.

He talks about why 90% of startups fail in his article 90% Of Startups Fail: Here’s What You Need To Know About The 10%.

Neil has some interesting insights in the article about the 10% that succeed and he’s shared some ways his mistakes nearly costed him his business. in the video below.

Startup Grind, a global meetup ecosystem for startups which is powered by Google, further establishes the overall 90% startup failure rate in this article, titled 90% of Startups Fail: Here Are 4 Expert Tips to Improve Your Odds.

However, there are many other startup industry experts who have addressed startup failure, but their anecdotes are brief and lack details.

Almost all articles on the web barely scratch the surface of why startups fail and how to increase your chances of success.

We really need to dig deeper, and that’s what I’ve been doing with Startup Survival Secrets so that the startup community can benefit from all of these findings.

 

Conclusion

The business and startup community needs to become educated on why so many businesses are failing and what can be done to prevent them from getting into the situations that cause their startups to fail.

Combating startup failure starts with education, the constant desire to improve yourself, and to improve your company with the best possible team. Innovation, creativity, and learning by your team are at the core of what makes a winning business.

Aside from the value that you actually bring with your startup’s product or service, you and your team are going to be the group of people that will make it a success or a failure. Bring on and hire the best people with the utmost integrity, humility, and great skills so that your startup can not just survive, but thrive — not take a nose dive.

Carl Potak
Carl is the Founder and CEO of StartupDevKit, an online startup incubator and accelerator with the mission of supporting and empowering early stage startups with education, resources, and mentoring to help founders and their teams not only succeed, but reach their highest potential.

Carl has been building and growing startups since 2007 as a founder, consultant, marketer, and recruiter. He's the author of the book Startup Survival Secrets, earned a certification in Inbound Marketing from HubSpot Academy, earned a certification in Google Analytics from Google, earned a Bachelor's Degree from Binghamton University, and achieved Eagle Scout as a young adult.

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