If you’re thinking of starting a startup or you’re already a startup founder, then this post will help you discover why learning about startup failure is critical to startup success.
The startup world is very inclusive, but it’s also a dog eat dog world out there.
There’s lots of competition and there’s a big thirst to become unicorns.
To succeed, you have to become a student of the industry and of startups until you have mastered it.
And still, learning should never stop as you seek to better yourself, your team, and your company.
Yet a lot of founders don’t have the experience to make the right judgement calls or to even build a proper foundation for their startup.
And it costs them dearly.
You see, learning about startup failure is like learning about the history of your country and of the world.
We learn about our country’s and world’s history, in large part, so we can learn from our mistakes and successes to make a better future.
The same thing should be for startups, even though there’s no formalized and standardized education about it.
That’s why we are aiming to help with this respect, and are working to help better educate you about it.
When reading this article, you’ll become informed about:
- Why you should be aware about startup failure
- How startup failure can affect you
- About startup failure in the United States and worldwide
- Why startups fail
Why Startups Should Be Aware of Startup Failure
Awareness 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. This is because you then 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, the startup development process, in management, and in growth.
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. Don’t you think?
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.
And when startups can learn from other people’s past mistakes before they make them, then they’re setting themselves up for success.
This is a much better alternative to trial by fire and making your own mistakes that could cause startup failure. But sometimes, people have to do that to become awaked to the lesson that situation shows us.
Startups are reliant on the people that run them and buy from them. Therefore, by educating oneself and investing in learning and development, then startups are much more likely achieve startup success.
However, without being venture capital-funded, startups have between a 10% to 20% probability that it will be successful. If they are VC-funded, then they 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.
This is because it’s statistically probable that your startup will end up in the startup graveyard after 5-7 years.
However, YOU can create a brighter future for yourself.
When you take it upon yourself to learn about startup failure, and implement safeguards to prevent highly common mistakes, you can save yourself loads of stress and money.
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.
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.
Why Do Startups Fail?
Below, you can see the chart of the top 20 reasons for startup failure by CB Insights. These reasons are evolving and changing in order, as CB Insights continues to collect data about startups who have failed.
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.
The CB Insights study provides insight into the mistakes that caused startup failure. It includes personal viewpoints from the ex-founders as well as short anecdotes from the staff from CB Insights on their website, as well.
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.
It’s rather unfortunate to see that companies have formed without doing proper due diligence, business planning, and idea validation.
These three things account for: #1 – no market need, #2 – ran out of cash, #3 – not the right team, #4 – get outcompeted, #5 -pricing/cost issues, #6 – poor product, #7 – need/lack business model, #8 – poor marketing, #9 – ignore customers, and #10 – product mis-timed.
These are all of the top ten reasons why startups have been failing.
You would have to be incredibly lucky to have a successful startup without doing proper idea validation first.
However, going through a thorough idea validation process can help prevent most of these from happening.
And our Incubator Program’s idea validation course will most definitely help you determine whether or not you should continue pursuing the startup idea before making any long-term commitments. It will help you build a foundation for the business, which is critical to build upon so you can have a successful business.
We also dig deeper into the causes of startup failure within that program, and our Accelerator Program does even more of that, but also gives you even more guidance on how to prevent any of those reasons for failure from occurring.
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. You can check out their 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 one of the things I’ve been doing with StartupDevKit so that the startup community can benefit from all of these findings.
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. Do this and it will help your startup to not just survive, but thrive.
What is your biggest takeaway from this article?