Why Do Startups Fail? 6 Reasons

A startup company is a business that intends to grow quickly and profitably in a way that disrupts the current markets and helps the business’ field evolve. Startups are often designed for scalability, meaning the company’s ability to grow is not hindered by its financial or human resources. Many startup companies look to change how people perform everyday tasks, such as brushing teeth, sharing photos, and booking vacation rentals.

California’s Silicon Valley has a high concentration of startups due to the area’s universities and investment resources—like venture capital firms, incubators, and seed accelerators. Many tech startups from Silicon Valley have grown to become some of the most successful worldwide.

According to the Bureau of Labor Statistics, 20 percent of startups fail within the first two years, 45 percent fail within five years, and 65 percent fail within ten years. If you want your startup to be a success story, consider the common pitfalls of failed startups and make a plan to avoid these mistakes.

There are many reasons a startup can fail. Here are six of the most common:

1. 1. Burnout: Particularly in the early days of a startup, entrepreneurs will not have much free time, and passion for the new business can quickly fade if the startup encounters significant early-stage challenges. Entrepreneurship requires diligence, but business owners who don’t take time to rest will ultimately suffer from a lack of focus, excitement, and drive.
2. 2. Incompatible team members: Startups tend to be more successful if led by cofounders rather than an individual, but bad partnerships are a major reason for business failure. Startup founders should bring different perspectives and know how to the table while maintaining a common vision.
3. 3. Issues with product-market fit: A post-mortem study of a hundred failed companies found that 40 percent of startups failed because they did not adequately consider market needs. Instead of considering customers’ needs generally, startup success depends on tailoring the business plan to a particular audience.
4. 4. Lack of money: Before a product can get off the ground, entrepreneurs secure venture capital or other startup funding to develop and manufacture the product. But if this process takes too long or if the product performs poorly in the market, stakeholders may withdraw funding necessary to sustain the startup. Or, even if a product is selling well, high operational costs can eat up cash so quickly that the company fails to turn a profit. Pricing issues can also create cash flow problems if the product is too inexpensive to turn a profit or too expensive to attract buyers.
5. 5. Legal challenges: Small businesses sometimes get tangled up in regulatory or legal issues that halt momentum. If this is too costly or time-consuming, a startup may have to shut down.
6. 6. Poor business model: Success in the market depends on a detailed business plan that accurately considers costs, production timelines, and market research. Failed startups often miscalculate these factors, or fail to revise the original business model when unforeseen circumstances arise.

Startup failure is common, but you can increase your chances of success in the first year with careful planning and research. Here are a few tips:

• Be goal-oriented. Prioritizing your goals will help you monitor your progress on different metrics, like startup funding, and it will give you and your team members a way to remain on the same page about the direction of the business.
• Be persistent. First-time startup founders will inevitably spend significant time improving their product or business plan based on feedback, mistakes, and advice from mentors. Even if your first business idea doesn’t stick, keep going back to the drawing board until something takes off.
• Pay attention to market needs. To ensure a product will fit customers’ needs, entrepreneurs should closely monitor market demand and seek feedback from potential customers during product development. Market research should directly inform your business plan.
• Monitor cash flow. The valuation of new businesses can rise and fall erratically. Whether you rely on crowdfunding or venture capital, ensure you have sufficient investments to sustain your startup until you reach a milestone that will increase the startup’s valuation.

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