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Entrepreneurship 25 Jun 2018

Why do startups fail?

An analysis of the stories behind about 100 founders of startups that have closed down reveal the many hurdles in the way of creating a successful company.

Business magazines and specialist bookstores are full of business success stories with a host of examples of the road to follow to transform a simple idea into a benchmark company. However, entrepreneurs that end up being the focus of analysis and admiration are the exception to the rule. Everyday a handful of startups crash with more or less of a bang. It could be that there is more of a lesson to be learned from failure than from success.

With this in mind, the consultant CB Insights has delved into the stories of 101 startups that called it a day. Analyzing and classifying the reasons behind this, it came to the following conclusions about why startups fail.

The main reason behind the failure of startups is clear: they simply fail to offer a product or service the market wants. This was the cause cited by 42 percent of the entrepreneurs for the closure of their business in the cases examined by CB Insights.

It may be that these companies have done a fine job but consumers are not looking to reward entrepreneurs for this with their money; they are looking to resolve a need. An example of this is Intronet, a startup that aimed to compete with LinkedIn, but lasted only three years. One of the founders acknowledged that they hadn’t been able to offer what the market wanted.

grafico-startups-BBVA

The second reason is in fact a consequence in that the startup simply ran out of the money it need to remain in business either because its product or service did not have the expected success or because investors grew tired of handing over money without seeing anything back from it and there was no one else willing to take over from them.

This was the case in 29 percent of the closure stories examined by the consultant. At least these entrepreneurs got farther along the road than the 8 percent who said interest on the part of investors was insufficient in the first rounds of financing.

One of the main challenges facing startups after coming up with their dream product or service is getting their pricing policy right. The price has to be high enough to cover costs but low enough to be attractive to the consumer. Some 18% of entrepreneurs that had to close cited failure in this aspect of the business as one of the reasons their business did not prosper.

It’s not all about the money

Apart from the financial reasons behind failure, there are other causes that have more to do with corporate governance, entrepreneurial “chemistry” and simply human nature. The study points to the failure to get the right team together as being the third cause of the demise of a startup.

When Standout Jobs –a jobs portal– decided to close up shop, it left written testimony in the form of a valuable lesson: “If the founding team can’t create a product on its own or with a small team of helpers, they it shouldn’t start up a company”. The alternative is to sign up the professional profiles the founders lack by offering them a share of the business.

Reasons such as differences of opinion between investors and founders or managers, the wrong timing for a launch (at times too early when there is no demand, at times too late when the window of opportunity has closed), entrepreneurial or personal burnout or at the other extreme a lack of passion and dedication on the part of the founders are also among the non-financial causes of failure.

The conclusion to be drawn is clear: there are almost as many ways of getting it wrong as getting it right. There are interesting lessons to be drawn from both.

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