Thursday, September 25, 2014

The Top 20 Reasons Why Startups Fail, A New Study by CB Insights

A key reason why startups fail is the lack of a market for their offering. Other top reasons include running out of cash, having the wrong team, or their inability to overcome competition, according to a novel report released today. Of course, there is often more than one reason for any failure.

 “One of our most popular research briefs of all time was our compilation of startup failure post-mortems,” says  Anand Sanwal, CEO of CB Insights.  “A common question/request we received after publishing it was whether we could analyze all of them to see if there were recurring reasons cited for startup failure.  And so we finally bit the bullet and analyzed each and every post-mortem to see if we could distill out those reasons.

“This type of analysis hasn’t been done before; the result of sifting through what is now 101 startup failure post-mortems can be seen in our new report.

“After reading through every single one, we’ve learned two things. 

  • One – there is rarely one reason for a single startup’s failure,
  • And two – across all these failures, the reasons are very diverse.

“And so after sifting through these post-mortems, we identified the 20 most frequently cited reasons for failure. Since many startups offered multiple reasons for their failure, you’ll see that our tables highlighting the top 20 reasons doesn’t add up to 100% (it far exceeds it).”

#1 – Building a solution looking for a problem, i.e., not targeting a “market need” (42%)
Tackling problems that are interesting to solve rather than those that serve a market need was cited as the number one reason for failure in a notable 42% of cases.
#2 – Ran out of cash (29%)
Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by failed startups. 
#3 – Not the right team (23%)
A diverse team with different skill sets was often cited as being critical to the success of a starting a company. Failure post-mortems often lamented that “I wish we had a CTO from the start, or wished that the startup had “a founder that loved the business aspect of things”.
#4 – Get outcompeted (19%)
Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space. And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 19% of the startup failures.
#5 – Pricing/Cost Issues (18%)
Pricing is a dark art when it comes to startup success and startup post-mortems highlight this difficulty in pricing a product was not too high or too low to make money in context of the particular costs of a company.
#6 – A “User Un-Friendly” Product (17%)
Bad things happen when you ignore a user’s wants and needs whether done consciously or accidentally.
#7 – I got this product. Now I just need a business model (17%)
Failed founders seem to agree that a business model is important – staying wedded to a single channel or failing to find ways to make money at scale left investors hesitant and founders unable to capitalize on any traction gained.
#8 – Poor Marketing (14%)
Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. The inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product and came up in 14% of the startup post-mortems.
#9 – Being inflexible and not actively seeking or using customer feedback (14%)
Ignoring users is a tried and true way to fail. Tunnel vision and not gathering user feedback are fatal flaws for most startups.
#10 – Release product at the wrong time (13%)
If you release your product too early, users may write it off as not good enough and getting them back may be difficult if their first impression of you was negative. And if you release your product too late, you may have missed your window of opportunity in the market.
#11 – Lose Focus (13%)
Getting sidetracked by distracting projects, personal issues, and/or general loss of focus was mentioned by 13% as a contributor to failure.
#12 – Disharmony with Investors/Co-founders (13%)
Discord with a cofounder was a fatal issue for startup post-mortem companies. But acrimony isn’t limited to the founding team, and when things go bad with an investor, it can get ugly pretty quickly.
#13 Pivot Gone Bad (10%)
Pivots like Burbn to Instagram or ThePoint to Groupon can go extraordinarily well. Or they can be the start of a path down the wrong road.
#14 Lack Passion and Domain Expertise (9%)
There are many good ideas out there in the world, but 9% of startup post-mortem founders found that a lack of passion for a domain and a lack of knowledge of a domain were key reasons for failure no matter how good an idea is.
#15 – Location, Location, Location (9%)
Location was an issue in a couple different ways. The first was that there has to be congruence between your startup’s concept and location. Location also played a role in failure for remote teams. The key being that if your team is working remotely, make sure you find effective communication methods; else lack of teamwork and planning could lead to failure.
#16 – No Financing or Interested Investors (8%)
Tying to the more common reason of running out of cash, a number of startup founders explicitly cited a lack of investor interest either at the seed follow-on stage (the Series A Crunch) or at all.
#17 – Legal Challenges (8%)
Sometimes a startup can evolve from a simple idea to a world of legal complexities that can prove to be a core cause of shutting a startup down.
#18 – Do not use your connections or network (8%)
We often hear about startup entrepreneurs lamenting their lack of network or investor connections so we were surprised to see that one of the reasons for failure was entrepreneurs who said they did not properly utilize their own network.
#19 – Burn Out (8%)
Work life balance is not something that startup founders often get and so the risk of burning out is high. Burn out was given as a reason for failure 8% of the time The ability to cut your losses where necessary and re-direct your efforts when you see a dead end was deemed important to succeeding and avoiding burnout as was having a solid, diverse and driven team so that responsibilities can be shared.
#20 – Failure to pivot when necessary (7%)
Not pivoting away or quickly enough from a bad product, a bad hire or a bad decision quickly enough was cited as a reason for failure in 7% of the post mortems. Dwelling or being married to a bad idea can sap resources and money as well as leave employees frustrated by a lack of progress.

What's next from CB Insights? "The Top 20 Reasons Why Startups Succeed?"  That's the report we'd all like to see.

CBInsights is a National Science Foundation-backed data-as-a-service firm that collects information on private companies and their investors and acquirers.  CB Insights data and technology is used by firms to make better marketing, procurement, lending, acquisition and equity investment decisions and to gather data-driven market and competitive intelligence.  The firm's data is regularly cited by leading media publications including the New York Times, Forbes, Bloomberg BusinessWeek and Fast Company among others.  The full report on Startup Failure can be found here.

1 comment:

Anonymous said...

Thanks for sharing this useful information. Its really useful for us.

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