The Main Reason Why Startups Fail

Gijs van Wulfen

We all know so well the success stories of Facebook, Airbnb, Twitter and Uber. But only a few startups are successful. In this post you can read the main reason why startups fail.

 Eric Ries, author of The Lean Startup, defines a startup as “a human institution designed to create a new product or service under conditions of extreme uncertainty.” And the facts reflect the extreme uncertainty mentioned.  

A US study among 2000 startups financed with venture capital between 2004 and 2010 reveals that more than 95% of the startups fail to see the projected return on investment. An estimated 30% to 40% of high potential US startups liquidate all assets, with investors losing all their money. Of all startups, about 60% of the companies survive to age three and roughly 35% survive to age ten, according to the US Bureau of Labor Statistics. Startups fail according to Ries because the old management methods of a good plan, a solid strategy and thorough market research don’t work for startups, as they operate with too much uncertainty. Also according to Ries, adopting the just-do-it mentality does not work either.

An analysis of 101 start-up post-mortems, by cb insights, shows us the top 20 reasons why startups fail. 

First of all there is to know that there is rarely only one reason why start-ups fail. As there're are so many reasons the charts far exceeds the 100%.  The main reason though why startups fail, is that the founders have a 'big idea' and come up with a so-called solution for something there is no market need. In 42% of all failures this was the case.

 “I realized, 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.” [Patient Communicator].

“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 behavior, great reputation as a though 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." [Treehouse Logic]

A successful start-up needs three ingredients: a relevant market need, a feasible simple solution and a viable business model. An important lesson to learn for innovators is to always look for a relevant market need (pain point) first, before you ideate a new simple solution.