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Against the odds: 4 statistics explaining startup failure, and what you can learn from them

If you are looking to start your own company, you probably do not want to read about startup failure stats. That is understandable – the statistics do not make for easy reading. According to Why Startups Fail: 2022 Report by business analytics platform CB Insights, a leading tech market intelligence database for emerging trends, around 90% of fledging businesses are doomed to fail.

In response to this fact, you could just disregard the figures and forge ahead with your startup dream. Or you could take a closer look to see what you can learn from past startup failures.

To assist you with the second option, we have taken data compiled by CB Insights to examine the top 4 reasons for startup failure:

  1. 38% – ran out of money
  2. 35% – no market need
  3. 20% – beaten by the competition
  4. 19% – flawed business model

The following sections reveal the lessons to be learned from each of those reasons, knowledge of which could increase your odds of becoming one of the 10% of startups that succeed.

1. Ran out of money (38%)

One of the most common reasons startups fail is that they simply run out of money. This could be through poor money management, a failure to secure funding, or a lack of revenue.

As an entrepreneur, you are going to spend the first few years spending more than you earn. But the key to liquidity is understanding your burn rate and cash runway.

  • Burn rate = how quickly you use up your cash reserves
  • Cash runway = how long you can operate at a loss before running out of money

An example of failure due to high burn rate is US P2P car marketplace Beepi. Initially securing a very healthy US$149 million in investor funding, the company burned through an estimated US$7 million a month on ridiculously high executive salaries and frivolous spending. The excessive burn rate eventually led to Beepi’s demise.

What you can learn:

Understanding your burn rate and cash runway can help you work out how long your business has viably got before it needs to become profitable or seek further funding. It can also help you create a feasible budget.

Ways to reduce startup burn rate:

  • Smart hiring – create a non-hierarchal, flat operational structure with a smaller team of multi-skilled and multi-tasking employees
  • Reduce unnecessary spending – cut down on anything that is not essential to your core business activities
  • Create a sound revenue model – consider additional income sources depending on your industry – for example, licensing, markups, affiliates, and subscriptions

2. No market need (35%)

Spending time, effort, and money developing a product or service no one needs, or that already exists, is the reason 35% of startups fail. Even established giants can sometimes get it wrong.

Take Google Glass. While not lacking in innovation, Google’s wearable technology failed to find a market and take off. The ‘smart device’ glasses were not popular with consumers, who considered them too expensive while offering very little value.

This can be seen as a classic case of not doing your research to better understand your target audience.

No matter how innovative your product or service, lack of in-depth market research is a guaranteed way of failing before you have even started.

What you can learn:

To ensure your startup stands a chance, you need to determine whether there is a market need for your offering. Rather than building the product, then searching for your ideal consumers, you should follow the process in this order:

  1. Research, research, and research your target audience
  2. Identify their pain points and problems
  3. Work out a solution
  4. Build/develop the product

3. Beat by competition (20%)

Underestimating or disregarding your competitors is a fatal error. Yet, 20% of startups put their failure down to being beaten by the competition. Your main rivals could be another startup with a better product, service, or marketing strategy, or an established company that has already built up a strong and loyal following. Either way, it is vital to keep track of your competition and study their strengths, weaknesses, and positioning to help improve your own strategies.

A prime example of failing to keep up with competitors is Digg, one of the first social news platforms to emerge in the early 2000s. Hugely popular initially, the website began to dwindle as it was outcompeted by the likes of Reddit, Facebook, and Twitter. These new social media platforms offered more engagement and a better overall user experience. By not adapting to the new internet landscape, Digg failed to keep up with its competitors. It was eventually eclipsed by Reddit, which offered a more welcoming and nurturing community feel.

What you can learn:

To stay ahead, you need to stand out from the competition:

  • Focus on your Unique Selling Point – the USP that differentiates you from your rivals.
  • Take a customer-first approach – focus on your customer needs, from a clear marketing strategy to a top-notch customer service that engages customers and encourages loyalty to your brand.
  • Innovate – avoid becoming too complacent by searching for ways to continuously improve your offerings, from new products and services to changing processes that will facilitate the customer experience.

4. Flawed business model (19%)

A strong and sustainable business model is fundamental for startup success. Without a clear plan of operational processes and revenue generation, any company is doomed for failure.

It is the reason why Indian e-commerce grocery delivery startup, PepperTap, eventually shut down. Receiving US$51 million of venture capital funding, the company built a large and loyal customer base thanks to huge discounts and minimal charges. But the high costs of last-mile deliveries meant the business was losing its precious VC money on every delivery. With no sustainable way to make a profit, the company was forced to close.

What you can learn:

Never lose sight of the bottom line. Create a viable business model based on:

  • Who your customers are
  • What value you will be delivering to them
  • How your business will operate
  • How your business intends to make money

The good news? – You can learn from your failures

One good thing about failure is you can learn from it. Others have, and their failures have led to success further down the line. Some even believe you need to fail in order to succeed.

LinkedIn co-founder Reid Hoffman attributes much of the platform’s success to lessons learned from his failure with an earlier platform called SocialNet. Evan Williams created a podcast platform called Odeo back in 2005, but was unable to compete with iTunes. He decided to shut the company down and focus instead on a side-hustle called Twitter.

You may end up as one of the 90%, and you may even fail more than once. But, learning from past mistakes and the failures of others might just improve your odds.

Do your homework, know your customers, keep track of the competition, and keep an eye on your cash flow. Above all, set up a viable business model that shows clear and solid potential, and your startup may be one of those one-in-ten success stories.