Every year thousands of startup businesses launch, with hopeful entrepreneurs taking a risk to try and cement their new company within the industry of their choice.
Just 10% of those businesses will succeed. In fact, two out of ten startups will fail in the very first year.
Why do so many startups fail?
Global funding for startups grew by $8 billion in the first month of 2021 alone. In 2022, the United States was home to over 71,000 startups, with over 430,000 applications for new businesses being filed in January 2022 alone. Despite the sheer number of new businesses that launch each year, common mistakes continue to doom nine out of 10 to failure.
1: No Demand
According to Failory, the most common reason startups fail is targeting the wrong market. In fact, 34% of new businesses cite “lack of product-market fit” as the straw that broke the camel’s back. Business founders and owners overestimate the value of their product or service by an incredible 255%, leading to a fatal lack of leads and sales.
Startup owners often make the mistake of assuming that because an idea or a product is new, it will automatically sell – forgetting that sometimes products do not yet exist because there is no demand for them. Before investing time and money into your idea, check that there is a real demand for it.
2: A Lack of Experience
For many startup owners, the launch of their new business marks the first time they have ever run a company. When it comes to startup success, experience pays off: founders of a previously successful business have a 30% chance of their next business also being successful. Meanwhile, first-time founders have an 18% chance of success – almost half that of their more experienced counterparts.
While an owner with past experience running a business is a valuable asset to any startup, gaps in experience can be made up for by choosing the right team members to round out your knowledge and skill set.
3: Running Out of Money
Money makes the world go round, and the world of startups is no exception. In fact, 29% of startups fail after running out of money. Investing in a startup is a risky venture: according to Harvard Business School, in just under half of cases investors in startups lose their entire initial investment.
With investors reluctant to take risks, some startups fail to raise vital new capital, while others are unable to make the sales they need to break even. Whatever the reason, the end result is the same: no money equals no business.
4: The Wrong Team
A business is only as good as its people. For 18% of startups, team problems lead to the failure of the business. Sometimes a startup’s employees lack the necessary experience or knowledge to carry out tasks, sometimes the pressure of being responsible for the success of a new business leads to employee burnout, and sometimes they simply are not the right people for the job.
Startups typically have a small team, with only 2.2% exceeding a team of 10, so picking the right employees is crucial.
5: Not Pivoting
A business pivot occurs when a company shifts or changes its strategy to account for changes, whether that’s in industry, customer demographics, or any other factor. Many startups see pivoting as a failure, but in fact, startups that pivot have three times better user growth, and raise over twice as much money.
There is no shame in pivoting: Twitter began its life as Odeo, an online library for podcasts, while Starbucks originally sold espresso makers and coffee beans. Sometimes the road to success only becomes clear after your business has already launched.
6: Unexpected Curveballs
Sometimes the market simply deals you a bad hand. For example, startups that launched just before the coronavirus pandemic found themselves in a dramatically changed market. Unexpected shutdowns, capacity restrictions and disruptions to supply chains caused many businesses – startups and established companies alike – to go under.
For startups, sudden changes to the market can be deadly. Without an established customer base and a pool of resources to fall back on, a new business can suddenly find itself floundering.
New business failure rates are similar across industries – there is no industry where your business is statistically more likely to succeed.
It’s not all doom and gloom for startups though. In 2021, ByteDance – the Chinese startup responsible for developing TikTok – grew to the value of $250 billion. Meanwhile, the number of unicorns – startups valued at over $1 billion – rose to a collective worth of $1.394 trillion.
According to business guru Mary Juetten, the line that ultimately separates startup success from failure is enjoyment: “All of the work you put into your business is ultimately pointless if you’re miserable every day on the job. It’s alright to have fun on the job so long as the work is getting done; it’s certainly preferable to the notion of toiling away in a windowless room.”
So don’t break out the champagne just yet – but never underestimate the value of doing what you love.