Top reasons why startups fail

Top reasons why startups fail
Top reasons why startups fail

7 min read
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Inventor of PayPal, Peter Thiel, once described entrepreneurship this way: “it’s like building an airplane while you’re falling off a cliff.” Considering this metaphor, perhaps it’s not so surprising that the majority of tech startups fail.

Startup culture can be cutthroat, exhilarating, exhausting and downright grueling. And yet it’s also a volley of ideas with the hopes of joining the ranks of a 1.2 trillion-dollar tech startup economy.

Some startup failures had promising starts, such as Sidecar, the precursor to Uber, or Beepi, who was flush with money from investors. So why exactly did they and others like them fail? What are their stories and how can we learn from them?

Market Irrelevance

A CB Insights study found that a full 42% of startups fail because they designed a product or service the market doesn’t need. There can be a tendency in startups to get excited about an idea that, in the end, really only caters to the interests of your own team members, a very small and unviable niche. For example, eCrowds, a company that manages web content, confessed that, “We spent way too much time building it for ourselves and not getting feedback from prospects- it’s easy to get tunnel vision.”

The startup Arivale Inc. had $52.6M in funding for their product that would “provide individuals a scientific path to optimize wellness and avoid disease for a life filled with joyful moments.” The essential problem was that there was no market for their product.

And then there are those startups whose products would be a great success in about 10-15 years. Aria Insights is one such case. Their product was unmanned air vehicles for search and rescue missions and bridge inspections. They managed to raise $39M in funding, but they were too far ahead of themselves to succeed as their product solved a problem that was nonexistent.

Money Problems

At times investors shy away from investing in a startup because they lack the backup and support needed to achieve success. Going it alone can seem like a benefit with a slimmer team, less overhead and greater ease in managing fewer people. In fact, the early days of a startup are where most of them take a nosedive as they struggle to keep afloat in time to reach their launch and attract investors. Signing on with a co-founder helps to lower initial costs and over the long-term makes the start-up more attractive to investors. Startups with co-founders raise 30% more investment and are less likely to scale too quickly.

This is important to note as 29% of startups go under due to lack of liquidity, so please do heed the lessons of repentant startups such as Wow Air, a European budget airline. According to aviation publication One Mile at a Time, “The airline has never been profitable, and while I guess their plan was to be acquired, I think they overplayed their hand and waited too long because last year we reached a point where European airlines started struggling to get financing, given that several airlines collapsed… they quickly entered the India market and pulled out, got rid of their A330s and desperately started looking for financing.” Their own Chairman, Skuli Mogensen sent a message to employees taking the blame: “We have run out of time and have unfortunately not been able to secure funding for the company… I will never be able to forgive myself for not taking action sooner.”

In the case of Beepi, a used car marketplace, expectations were high after receiving $60M in Series B funding in 2015. However, poor administration ultimately led to the company’s downfall, with high salaries and luxurious spending, the company ended up having to fire its 180 staff members after their Chinese investor pulled out. Overall, the company frittered away $149M in funding.

And then there are those startups that never get off the ground in the first place because they could never find an investor. In the case of Doppler, a smart earbuds startup, their literally hundreds of fruitless meetings ultimately forced them to give up. “The feedback we continually got is, ‘we are not investing in hardware, and we especially are not investing in hardware at these numbers.’ It’s too high a risk, even for the Valley.”

Lack of alignment between startup founders and investors

The human business of startups includes defining and aligning values and strategies. The more aligned founders and investors are, the more likely the pairing(s) will find long-term success. In the case of company ArsDigita, conflict between him and other company leaders led to difficulties in key decision-making.

And in the case of NewsTilt’s founders, they ended up building a product that they weren’t actually interested in, “I think it’s fair to say we didn’t really care about journalism. We started by building a commenting product which came from my desire for the perfect commenting system for my blog…This led to designing the best damn commenting system ever, which led to figuring out an ideal customer: newspapers… But we didn’t really care about journalism, and weren’t even avid news readers…And how could we build a product that we were only interested in from a business perspective.”

Legal issues

Music startups have a particularly difficult time staying clear of legal battles and Turntable.fm discovered that the hard way. “Ultimately, I didn’t heed the lessons of so many failed music startups. It’s an incredibly expensive venture to pursue and a hard industry to work with. We spent more than a quarter of our cash on lawyers, royalties and services related to supporting music. It’s restrictive. We had to shut down our growth because we couldn’t launch internationally.”

Beat by the competition

Sidecar was a successful ridesharing startup that had succeeded in raising $35M but was forced out by Uber in 2016. “In short, we were forced to shut down operations and sell. We were unable to compete against Uber, a company that raised more capital than any other in history and is infamous for its anti-competitive behavior. The legacy of Sidecar is that we out-innovated Uber but still failed to win the market. We failed – for the most part – because Uber is willing to win at any cost and they have practically limitless capital to do it.”

Burnout

There’s a mindset in startup culture that fuels the idea that in order to succeed, you must put in the famed 80-hour startup workweek. As entrepreneur Bernie Klinder told Forbes magazine, “There is never enough time in the day to get everything done. Every employee is doing the job of multiple people and have to do more every day.” Burnout is a very real issue in such high-pressure circumstances where the success or failure of all your work is so precariously balanced. As former CEO of Zenefits, Parker Conrad commented, “I think people are unprepared for how hard and awful it is going to be to start a company. I certainly was.”

Conclusion

Startups fail for a number of reasons, but, as you read above, the key issues are inventing a product that has no market relevance and money problems. Beyond those two main issues, a myriad of other issues can appear such as legal issues, losing to an aggressive competitor, suffering from burnout, and failing to find alignment between founders and investors.

With so much noise out there about startup failures and the next big thing, Jules Pieri, co-founder and CEO of The Gromnet gives this advice to startups: “Ignore the hype you see about startups in the press. It’s usually a pack of lies and half of them will be dead in a year. Focus on building your business so you can be the one left standing.”