The statistics around start-up failure are well-known. More than half of new businesses fail in the first five years. But what is it causing them to go under?
CB Insights took a look at the post-mortems of more than 100 start-ups and worked out the top 20 reasons that start-ups fail. They found that generally new businesses die about 20 months after raising financing and after having raised about $1.3 million.
Among the top 20 reasons that entrepreneurs see their businesses fail are burnout, not using their network, lack of interested investors, location, and disharmony between investors or co-founders. But here’s the top five reasons that start-ups fail…
Financing is one of the toughest challenges that every start-up faces. Prices too high and you’ll fail to gain customers, prices too low and you’ll fail to make a profit.
App monitoring start-up delight.io saw this struggle in a number of ways. "Our most expensive monthly plan was $300. Customers who churned never complained about the price. We just didn’t deliver up to their expectation," they wrote in their closing blog.
Many entrepreneurs think that they shouldn’t pay any attention to the competition or what others are doing but once an idea becomes popular there are often many start-ups working in the same space. While obsessing over what the competition are doing isn’t healthy, nearly a fifth of the start-ups that CB Insights looked at found that ignoring them was equally damaging to their business.
"Between the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly," Mark Headland of Wesabe said in his post-mortem. "Everything I’ve mentioned – not being dependent on a single source provider, preserving users’ privacy, helping users actually make positive change in their financial lives – all of those things are great, rational reasons to pursue what we pursued. But none of them matter if the product is harder to use."
3. The wrong team
It’s important to make sure you have the right people working on your business right from the beginning. CB Insights found that many of the post-mortems said that they wished they had a CTO form the start, or that they wish they had a founder who "loved the business aspect of things".
One start-up who fell foul of this mistake was Standout Jobs, which admitted that their founding team couldn’t build a minimum viable product on its own. "That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a start-up. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t."
2. Cashflow problems
29 per cent of start-ups said that the question of how to spend money was what caused their failure. However, it’s also often tied into other problems that start-ups face, including product-market fit and failed pivots.
The team at Flud found this was what happened to them. "In fact what eventually killed Flud was that the company wasn’t able to raise this additional funding. Despite multiple approaches and incarnations in pursuit of the ever elusive product-market fit (and monetisation), Flud eventually ran out of money – and a runway."
1. Not targeting a market need
Entrepreneurs can often fall into the trap of tackling a problem that is interesting to solve, rather than one that serves a market need – in fact 42 per cent of the start-ups that CB Insights looked at cited this among the reasons for their failure.
The founder of Patient Communicator said: "I realised, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office."
Treehouse Logic also acknowledged this as an issue in their post-mortem. "Start-ups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behaviour, great reputation as a thought leader, great expertise, great advisors, etc, but what we didn’t have was technology or business model that solved a pain point in a scalable way."
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