Guest post by James Burbank, editor in chief at BizzMarkBlog
Even the birds in the trees know that sentence that, for some reason, opens at least half of all startup-related articles – the one with nine out of ten startups not surviving the first couple of years, or something along those lines.
It is an eye-catching statistic, that's for sure and you cannot really blame bloggers for using it. That being said, it has been used for far too long and there is more and more doubt that it is even a correct piece of statistics.
What we can all agree on is that running a startup is not easy and there are innumerable reasons as to why startups fail. Today, we will be looking at the most common of these reasons and how you can avoid them as a startup founder.
The Numbers Behind It All
In order to identify which reasons are the most common, we will be using two, by now, famous studies on startup failures. The first one was done by CB Insights back in 2014 and it identified 20 most common reasons startup failed back then. The second one is more recent, done by Fractl in 2016, diving into more detail and using 193 "post-mortems" of startups whose founders had been forward enough to share their mistakes.
It has to be pointed out that these two studies have been done on a limited number of cases and that they might not paint the whole picture at all. Still, it's the best we have got and the issues raised by these two studies are interesting, to say the least.
Lack of Market Need
According to the 2014 CB Insights research, the most common reason why startups failed was the lack of market need. According to them, more than 40 percent of all startup founders cited the lack of market need as one of the reasons they had to close down shop. Fractl discovered that only 12 percent of the startup founders they interviewed cited the lack of market need as one of the reasons for their failure. It was the sixth most common reason according to them.
One thing is for sure, actually having an interested market is crucial for the survival of your startup. Market research can be very complex, but it can also be done without spending too much. Sometimes it is just common sense, like in the case of Sparesbox, an auto parts ecommerce startup which took only three years to become Australia's biggest such business. They simply knew that there is a market for non-overpriced spare parts – the whole of the country.
Business Model Problems
Another cause for failure that featured prominently in both pieces of research are problems with the business model. According to CB Insights' 2014 study, it was one of the reasons behind the failure of 17 percent of the startups they researched. Fractl had "business model not viable" as the very first of startup failure causes, with 26 percent of all founders saying it was one of their biggest problems.
In other words, even startups that had great product ideas discovered that a company cannot be built on nothing but an idea. Sure, an idea will be at the core of a startup every time, but it has to be built upon if the startup is to survive. Once you get that Eureka! idea, put everything down on paper, talk to someone.
Make sure this idea can be turned into a business that will bring in revenue.
Not Enough Cash
In the second place of both these studies, we find running out of cash as the common theme. Simply put, startups ran out of cash before they could become self-sufficient or before they could attract a new round of funding.
Perhaps most interestingly, running out of cash was the primary reason why startups with funding had to close down shop according to Fractl. They did separate studies of startups with and without funding and running out cash dominated the reasons why funded startups went under.
What this means is that you never rest, even when you get a financial injection. This is actually when you start working harder and harder. Money will run out and according to these studies, it will run out quickly. Make sure that you do something with it before it does.
Perhaps the most noticeable disagreement between these two studies can be observed in how high the wrong team and partnership choices ranked. When CB Insights did their study, not having the right team was the third most common reason for failure while Fractl discovered that it was only the tenth most common issue.
Perhaps startup founders became more careful about choosing the people to go into business with?
Whatever the reason for discrepancy might be, you have to make sure you have the right people with you when it comes to launching a startup. You do not have the luxury of replacing people who do not work out after a few months. Startups have to work out almost immediately or they do not work out at all.
Be smart about the people you choose.
If you want to find out more about how certain startups lost their way, make sure to check out these two studies. They will provide you with plenty of insights into the many different ways in which you can go wrong with your startup.
They will also let you know what to pay attention to.