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Over the last two decades of building and running businesses, and the last couple of years working full time with dozens of startup founders and CEOs on their strategies and funding plans in my consultancy business, I have observed that there are a common set of reasons that startups struggle and fail, and a consistent set of factors that make startup companies successful.
I wondered if my observations were supported by hard data, and my curiosity around startup success and failure eventually got the best of me. I decided to do some in-depth investigation around this topic. I wondered if there were any research studies that showed why startups succeed and fail? I found several articles that were filled with unsubstantiated opinionsand a few sources that had really great hard research around the topic.
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Why do companies fail?
According to an article in FastCompany, "Why Most Venture Backed Companies Fail," 75 percent of venture-backed startups fail. This statistic is based on a Harvard Business School study by Shikhar Ghosh. In a study by Statistic Brain, Startup Business Failure Rate by Industry, the failure rate of all U.S. companies after five years was over 50 percent, and over 70 percent after 10 years.
This study also asked company leadership the reason for business failure, giving a list of four main reasons for failure with sub-categories below those. They also gave a list of 12 leading management mistakes. It is worth checking out the details. This research-based analysis confirmed some of my observations. I bracket the Statistic Brain finding into seven key reasons for that entrepreneurs experienced business failure:
- Lack of focus
- Lack of motivation, commitment and passion
- Too much pride, resulting in an unwillingness to see or listen
- Taking advice from the wrong people
- Lacking good mentorship
- Lack of general and domain-specific business knowledge: finance, operations, and marketing
- Raising too much money too soon
All of these focus on the decision-making of the entrepreneur and general business knowledge.
Related: The Secret to Building a Successful Startup? Finding the Right Team.
In another study, CB Insights looked at the post-mortems of 101 startups to compile a list of the Top 20 Reasons Startups Fail. The focus was on company level reasons for failure. I think this list is instructive, but each of these reasons for failure is due to a failure in leadership at some level. The top nine most significant from this study are:
- No market need
- Ran out of cash
- Not the right team
- Got outcompeted
- Pricing/cost issue
- Poor product
- Need/lack business model
- Poor marketing
- Ignore customers
Notice that all of these are business- and team-related issues, even the ones that relate to the product. Issues like there are always tied to leadership and the leader's ability to build a strong team and drive a business model and business thought process and discipline. Also, keep in mind, if running out of money is the ultimate reason for failure, there are always other factors that cause this result.
Why do startups succeed?
Next, I looked for sources of information of why businesses were successful. I found some good research from Harvard Business School, Performance Persistence in Entrepreneurship, which suggest that serial entrepreneurs that have prior success are more likely to have success, and that the best VCs are good at picking serial entrepreneurs. However, that really didn't answer my question about the qualities of the entrepreneur.
The best comprehensive research that helped to answer the "reasons for success" question that I could find was from The Ecommerce Genome by Compass in their Startup Genome report, which looked at 650 internet startups. Although this research is tech industry specific, I still think it is very instructive. The report stated 14 indicators of success. Some of the 14 were a bit redundant, but you should review the report yourself. This analysis also confirmed some of my observations. I bracketed these 14 indicators into nine key factors for success:
- Founders are driven by impact, resulting in passion and commitment
- Commitment to stay the course and stick with a chosen path
- Willingness to adjust, but not constantly adjusting
- Patience and persistence due to the timing mismatch of expectations and reality
- Willingness to observe, listen and learn
- Develop the right mentoring relationships
- Leadership with general and domain specific business knowledge
- Implementing "Lean Startup" principles: Raising just enough money in a funding round to hit the next set of key milestones
- Balance of technical and business knowledge, with necessary technical expertise in product development
Are the reasons for success the opposite of those for failure?
There are things that you must possess to be a successful entrepreneur, but they won't guarantee success. That said, it stands to reason that if you fixed the reasons for business failure, you would at least improve your chances of success. So, I decided to look at the side-by-side comparison of the reasons for failure and the factors for success.
If you look at both the reasons for failure and the factors for success, it is clear that commitment to a plan is key. This, of course, implies having a plan. This does not mean that you are completely inflexible, but you can stay the course. This is why the most successful companies have one or two pivots. I do not think that every little business adjustment or fine-tuning as a pivot.
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A true pivot is a change in course of direction that results in a material change in the product-market strategy. It could be along the product axis or the market axis, but it has to be enough of a change that it really requires an adjustment in strategy and a corresponding adjustment in resource allocation. At least, that's my definition. Passion and motivation are the obvious factors. Every entrepreneur, business coach, consultant, advisor, newscaster, investor and industry analyst talks about passion. Steve Jobs is quoted all the time about this. It's probably become too cliché and overused at this point.
What I like about this analysis is that it goes to the root of the passion. People that are successful believe in what they are doing. The successful entrepreneur feels that they can make an impact and a difference in the world. There is so much inertia and negativity around getting a startup off the ground, much less getting it to "escape velocity," that if you don't have this deep-seated commitment to making an impact, you will surely give up. Successful entrepreneurs are competitive. They play to win, and they hate to lose. This trait may show-up differently with different personality types, but I have never met a successful entrepreneur that doesn't have a competitive spirit and a will to win.
The next two things go hand-in-hand. I kept them separate since I think mentorship is so important, and it has played such a huge role in my career success. Just because you are willing to learn does not mean that you are willing to seek a mentor and listen to their guidance. By the way, I'm not advocating that you take every piece of advice and guidance from your mentors, but if you have selected strong mentors that have significant domain, technical or business expertise, you should at least consider thoughtfully consider what they have to say. Otherwise, why have them around as a mentor? It gets to humility. It's one of those things when you think you have it, you don't.
Successful startups are businesses. It therefore stands to reason that you need to establish and implement solid fundamental business principles and practices to improve your chances of success. Many technical founders fall in love with their product idea and consciously or unconsciously believe that if they build a better mousetrap, the world will beat a path to their door. However, both the success and failure studies show that you need leadership in the company with general and domain-specific business knowledge to be successful. Of course, you also need to have strong technical expertise in your chosen product development area.
Does this mean that a technical founder cannot be successful as a CEO? No, it doesn't. Look at Dr. Irwin Jacobs, the co-founder and founding CEO of Qualcomm, as a classic example. Dr. Jacobs is a brilliant engineer and former professor at MIT. However, he also has a brilliant business mind and a lot of business knowledge. Prior to Qualcomm, Dr. Jacobs ran another company, MA-Com, so he had experience running a company. He also surrounded himself with a strong management team. There are many other examples of this success formula, but there are far more where there is a seasoned businessperson who has domain expertise leading the company, and a strong technical team driving product development. Steve Jobs (Apple, NeXT, and Pixar) is the classic example as a business-oriented founder. Meg Whitman (eBay) and Eric Schmidt (Google) are great examples of CEOs who were brought into companies at an early stage to complement an exceptional team of technical founders.
Finally, having a clear and realistic idea of how long things take, setting intermediate milestones for every 12 to 18 months, and raising just enough money it to get to the next set of key milestones, is not only important to capital efficiency, it is also important for success.
How do I become a member of the $100 million club?
Interestingly, according to the Kauffman Institute, in its article The Constant: Companies that Matter, the pace at which the United States produces $100-million companies has been stable over the last 20 years despite changes in the economy. The study sates, "Anywhere from 125 to 250 companies per year (out of roughly 552,000 new employer firms) are founded in the United States that reach $100 million in revenues." My former company, Entropic, achieved this status. How do you become part of that club? You need some luck and a good sense of timing. However, as said by the Roman philosopher Seneca, "Luck is what happens when preparedness meets opportunity."
Beyond that, you need a plan, persistence, perseverance, a willingness to be flexible, and a world-class team. You also need to be frugal, bright, and cultivate strong mentors. The best way know to do all these things well and efficiently is to follow a systematic process where you plan, commit, track results, promote accomplishments and raise the necessary capital, or "fuel in the tank," to drive the growth of your startup.
Plan. Commit. Win.
Lack of financing or investors. The study notes that 47% of startup failures in 2022 were due to a lack of financing, nearly double the percentage that failed for the same reason in 2021, based on CB Insight's data. Running out of cash was behind 44% of failures.Why some entrepreneurs succeed and why some failed? ›
Most entrepreneurs fail because they do not have the knowledge or are not prepared enough. The main thing that comes between an entrepreneur and the success of their business is fear. They fear failure, making mistakes, losing money, fear being embarrassed, and fear being left out.Why do some startups succeed? ›
For the success of a startup, the significant factor is an idea and the passion to get started. The idea should solve people's problems and provide a solution that no one has earlier developed or improved on an existing solution. Also, an idea has to be different, especially if it's following a trend.Why do 90% of startups fail? ›
Why Do Startups Fail? In order of frequency, these are the most common areas in which startups face problems that lead them to shut down: Marketing, Team, Finances, Tech, Operations, and Legal.Is it true that 90% of startups fail? ›
The reality is that 90% of startups fail. From budgeting apps to legal matchmaking services, businesses across every industry see more closures than billion-dollar success stories. And a whopping 10% of startups fail before they reach their second year.What are the top 5 reasons businesses fail? ›
- Poor cash flow management. ...
- Losing control of the finances. ...
- Bad planning and a lack of strategy. ...
- Weak leadership. ...
- Overdependence on a few big customers.
The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.What caused a successful and very profitable business to fail and collapse? ›
Businesses can fail as a result of wars, recessions, high taxation, high interest rates, excessive regulations, poor management decisions, insufficient marketing, inability to compete with other similar businesses, or a lack of interest from the public in the business's offerings.What are three startup problems? ›
Common startup problems include poor planning, poor leadership, failure to differentiate a product or service from others that are already available, ignoring the needs of customers, and not learning from failures. Capital shortages, poor locations, and scaling too soon can also cause a startup to have problems.What are 3 factors for startup success? ›
They may be technology companies, small businesses, lifestyle startups, wellness brands or pet care companies, but that's of little importance when it comes to startup success. The main factors that can affect a startup's success are timing, talent attraction management, funding and your personality as a founder.
There are four components that startup founders and entrepreneurs must pay attention to. These include market acquisition, human resources, intellectual property, and efficient capital management.Why do most startups fail in the first year? ›
The number one reason why startups fail is due to misreading market demand — this is found in 42% of cases. The second largest reason why startups fail (29% of cases) is due to running out of funding and personal money. Other notable cases of failure are a weak founding team (23%) and being beat by competition (19%).Why only 1 percent succeed? ›
The 1 percent know people like to buy the best products and services possible. So they make it their goal to be the best and produce the best. You are going to have a hard time producing the best products and services if you, personally, are not the best. So if you're not the best, don't focus so much on your work.Why are so many startups not profitable? ›
In the early stages, it's difficult to reach true profitability because the business needs to grow, investors need to be paid, and there isn't a lot of money to play with. Once your business generates $1 million and spends just $250,000, it's a different story.Why are startups struggling? ›
Another cause of startup struggles is inexperience. Many entrepreneurs lack the necessary business experience and skills needed to successfully launch and grow a business. This can lead to costly mistakes and mismanagement of resources, which can be detrimental to the success of the business.Do 65% of startups fail because of team issues? ›
In his book, The Founder's Dilemma, best-selling author and Harvard Business School professor Noam Wasserman claims that 65% of high-potential startups fail due to conflict among co-founders. A daunting statistic to be sure, but it comes as little surprise to anyone who has ever tried to start a business.How many startups survive 5 years? ›
However, it is estimated that around 90% of startups in India fail within the first five years of their operations. This failure rate is largely due to factors such as a lack of market fit, insufficient funding, and intense competition.How long do most startups last? ›
The average startup lasts between two and five years.
On average, 90% of startups survive one year. 69% of small businesses survive two years. However, only 50% of startups will survive five years.
- Lack of research. ...
- Not having a business plan. ...
- Not having the business funding they need. ...
- Financial mismanagement. ...
- Poor marketing. ...
- Not keeping abreast of customer needs or the competition. ...
- Failing to adapt. ...
- Growing too quickly.
- Complacency. ...
- Not prioritizing sustainability. ...
- Not putting customers first. ...
- Not relentlessly innovating. ...
- Not thinking of themselves as tech companies. ...
- Not treating data as a key business asset. ...
- Failing to attract and keep talent.
- Lack of planning and research. ...
- Cash flow problems. ...
- Insufficient or no demand for product or service. ...
- Ineffective marketing. ...
- Starting a business for the wrong reasons. ...
- Lacking the required knowledge, skills, and expertise. ...
- Unwillingness to learn, adapt or diversify. ...
- Leadership issues.
- Not having an effective business plan. ...
- Not putting the customer first. ...
- Not hiring the right people. ...
- Lack of flexibility. ...
- Lack of innovation. ...
- Not understanding your industry. ...
- The wrong mindset. ...
- Ineffective marketing strategies.
- Not doing enough market research. ...
- Not having enough money. ...
- Putting together the wrong team. ...
- Disagreements among partners. ...
- Not focusing on marketing. ...
- Relying too heavily on one customer. ...
- Getting beaten by competition. ...
- Picking the wrong location.
Insufficient Demand. Every company must have demand for its products or service to achieve success. If few consumers want to buy a company's products or services it may not be able to earn enough revenue to cover its costs and earn a profit.What separates successful businesses from those that fail? ›
One of the most important traits of a successful entrepreneur is perseverance. Perseverance is the ability to keep going despite difficulties or setbacks. It's the determination to never give up, no matter what happens. And it's this persistence that separates successful entrepreneurs from those who give up easily.Why do 95% of startups fail? ›
According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.What is the number one mistake entrepreneurs make? ›
Not Spending Enough Cash (or Spending Too Much)
As a new entrepreneur, money is likely going to be a tremendous concern. Most entrepreneurs barely have any money to spend, and those that do can often get into the “you have to spend money to make money” mindset, which is equally destructive if left unchecked.
According to the latest data, up to 90% of startups fail. Across almost all industries, the average failure rate for year one is 10% However, in years two through five, a staggering 70% of new businesses will fail.What is an example of a startup that failed? ›
Jawbone. In this list, Jawbone is one of the biggest failed startups. This electronics company gathered $930 million in venture capital.What are the top 5 factors in startup success? ›
According to Bill Gross, founder of Idealab, the five key factors influencing startups' success are the idea, team, business model, funding, and timing. Among them, timing is extremely important but can't be controlled. That is why startups often need enough funds to keep going until the business becomes viable.
- Vision. A strong core starts with a strong vision. ...
- Values. Entrepreneurs need to have a central value to their company. ...
- Product and Engineering. Effective sales and marketing used to be the foundation of great companies. ...
- Feedback Loops. ...
- Resilience. ...
Successful startups are constantly seeking to satisfy their customers. The importance of reinforcing awesome customer service should be made clear among your employees. Design your products with the customer in mind. Remarkable startups listen and respond to their customers' evolving needs and expectations.What are the 3 lean startup principles? ›
- Experimentation and learning - starting with hypotheses, rather than a business plan.
- Customer feedback - customer development.
- Short, iterative product development cycles - agile development.
The three business personalities: Entrepreneur, Manager, Technician. Every business owner takes on three distinct personalities in how they think about and work within their business: The Technician lives in the present and is focused on doing the work of making it, selling it and delivering it.How do you tell if a startup will succeed? ›
- Product-market fit.
- Robust market/user testing.
- Passion to disrupt the current market.
- Leadership ability and vision.
- An established, compelling company culture.
- Engaged communities.
- Willingness to hear feedback.
Many people think of brilliant start-up ideas and start their businesses. But, due to a lack of planning and correct guidance, they tend to fail. They fail to adapt to the changing environment and end up failing. Failure is hard to digest, but at the same time, it can prove to be the best teacher for us.Why do you think that some companies are successful startups but fail miserably when they try to expand? ›
Fortune reported the “top reason” that startups fail: “They make products no one wants.” A careful survey of failed startups determined that 42% of them identified the “lack of a market need for their product” as the single biggest reason for their failure.When most startups fail? ›
How many businesses fail in the first year? To found a startup means to risk a high failure rate. 20% of businesses fail in their first year and around 60% will go bust within their first three years.Why do founders often fail as CEOs? ›
One of the primary reasons why startup founders fail to grow into great CEOs is a lack of leadership experience. After all, many founders are first-time entrepreneurs, and they may not have the background or skills necessary to effectively lead a growing company.