The founders of failed startups blame anything from a poor product or business model to disharmony among investors or burnout. But the number one thing they believe kills a business is a lack of capital.
That doesn’t mean they’re right.
A report from tech insights platform CB Insights analysed 111 startup ‘post-mortems’, to pick out the top 12 reasons why startup fail.
And while there’s rarely one reason a business goes under, there were some issues highlighted more often than others. A pattern started to emerge.
The most-cited cause of failure was that the startup ran out of cash, or wasn’t able to raise more capital. That was cited as a contributing factor by 38% of founders.
A close second was the absence of market need, named as at least a partial cause of death by 35%.
That was followed by being ‘outcompeted’ (20%), having a flawed business model (19%), and regulatory and legal challenges (18%).
Other recurring issues included pricing or cost issues and a mistimed launch, while 6% blamed a ‘pivot gone bad’ and 8% admitted to having a poor product.
‘People’ problems were also not uncommon, with 14% saying they had the wrong team in place, and 6% saying disharmony among the team of investors contributed to their failure.
A not insignificant 5% pointed to their own burnout or a lack of passion. And it’s very possible those points are connected.
“The ability to cut your losses where necessary and redirect your efforts when you see a dead end — or lack passion for a domain — was deemed important to succeeding and avoiding burnout, as was having a solid, diverse, and driven team so that responsibilities can be shared”, the report said.
The top reasons startup founders said their venture failed are:
- Ran out of cash or failed to raise new capital (38%)
- No market need (35%)
- Got outcompeted (20%)
- Flawed business model (19%)
- Regulatory or legal challenges (18%)
- Pricing or cost issues (15%)
- Not the right team (14%)
- Product mistimed (10%)
- Poor product (8%)
- Disharmony among team or investors (7%)
- Pivot gone bad (6%)
- Burnout or lacked passion (5%)
But there is a problem with this data. This list covers the reasons startups failed, according to their founders. And, in actuality, they’re probably wrong.
In a subsequent CB Insights newsletter (a newsletter I thoroughly recommend, by the way), founder and chief Anand Sanwal suggests that a lack of cash is not itself the cause of the failure, but a symptom of it.
“Running out of cash means there was another problem with you, the team, the business, the product,” he wrote.
Luckily, Sanwal believes founders are being much more honest about reasons two to four.
“Nobody wanted your sh*t; other people’s sh*t was better; this sh*t wasn’t a real biz,” he summarised.
“‘Cuz one of these three happened, you ran out of cash or nobody would back you,” he added.
“Money gives you runway. It doesn’t buy the ability to execute.”
You can see the full report here on why startups fail, according to founders, here.