Why start-ups fail, according to their founders

Why startups fail, according to their founders

The top reason? They make products no one wants.

When the founder of a startup company shuts down her or his business, it is customary to pen an essay that tells the rest of the community what went wrong, called a failure post-mortem. Nine out of 10 startups fail, which is why the technique has become so common..  For most these essays are honest, enlightening, and brave when utilizing a third party to interview the founder/owner. This helps the founder to stay on task and nit point fingers or issue backward non-apologies. 

 The proliferation of the failure post-mortem has helped create a body of work where those publicly admitting to failure, and examining it, can take make a contribution. It also distills the narratives to case studies from which other entrepreneurs can learn.

CB Insights recently parsed 101 post-mortem essays by startup founders to pinpoint the reasons they believe their company failed. The company crunched the numbers to reveal that the number-one reason for failure, cited by 42% of polled startups, is the lack of a market need for their product.

That should be self-evident. If no one wants your product, your company isn’t going to succeed. But many startups build things people don’t want with the irrational hope that they’ll convince them otherwise. The confusion often stems from becoming attached to a "great idea" and ignoring market forces.  People must be willing to exchange money for the product or service, period.  End of story.

The most prominent modern example of this phenomenon is the mobile phone. People dismissed it as a novelty in its early days. Obviously, they are no longer a novelty. The late Apple co-founder Steve Jobs famously said, “A lot of times, people don’t know what they want until you show it to them.” The problem is that entrepreneurs have taken that to heart.

The failure to determine if people want your idea is at the core for startup failures.

There are more practical concerns. Polled founders also cited a lack of sufficient capital (29%), the assembly of the wrong team for the project (23%), and superior competition (19%) as top reasons for failure. See the CB insights chart below.

Running out of money has been a known root cause of failure for years.  Performing a proper analysis of cash flow to first dollar of profit is a requisite.   Those that fail to do so, are opening themselves wide open to the second most common reason for failure.

Except for low capital need, low risk small businesses,  product demand, or a lack thereof, is second behind a single founder.  The presence of a co-founder helps avoid many of the reasons cited at the bottom of the CB Insights chart,  including disharmony, poor marketing, and the wrong team.

In many cases, running out of cash does not cause a startup’s failure, it is a symptom of other issues. The most important being the lack of a well thought out business plan.  This does not mean a "budget".  The business plan states in very clear words what must be done to be a market success supported by a budget.  History has shown many times that without a business plan founders/owners find themselves in the open ocean without the tools to navigate.