With more than 90% of startups failing, it seems that having a successful startup can be one of the hardest things to do nowadays. But learning from the mistakes of others and seeing what caused their downfall can help us learn and create more successful startup businesses. Now, a startup usually doesn’t fail for only one reason, so many of these startup cases had multiple issues in common.
In ascending order, here are the top, most impactful 5 reasons that startups fail:
Regulatory and Legal Changes
There isn’t too much a startup can do when facing the law, but succumbing to this failure can be due to a startup being just too simple. Take Coolest Cooler, for example, a startup that tried to take a simple cooler and add all sorts of features to it such as a Bluetooth speaker, and other accessories. The startup eventually was run out of business due to the increase of the tariffs from China and was not able to have enough money to keep the startup going. It may not have been a terrible idea, but the startup was simply not able to keep its head afloat in a very competitive market, and its product failed. There isn’t much we can do to stop governmental policy, but we can limit our dependence on them and try to make sure they don’t affect us as much as possible, such as in this case by sourcing materials from places other than China.
Flawed Business Model
Having a flawed business model is more in our control, so we can do more to prevent and fix it. Avoiding reliance on a single channel for cash flow and finding ways to make money at scale are the two most important takeaways for trying to create a successful and healthy business model. Startups can significantly benefit from investments with a solid business model, so appealing to investors will help ensure your startup can succeed in the long run. One example could be Aria Insights, a company that wanted to make gathering information from hostile areas easier with drones and cameras. This however did not appeal to investors because commercial demand and regulations were just too slow to catch up with the supply of drone solutions. It’s an example where a company offers a solution to a problem that doesn’t exist yet on such a large scale that it’s possible to monetize from it. In other words, the company was way ahead of itself, so the startup shuttered its doors forever.
Getting Beat by the Competition
Getting outcompeted is a rather obvious but essential failure that needs to be considered. Startups are already hard enough, and the competition won’t make it easier, so succeeding where other startups do not is what can help you stay in the game. Having ideas that aren’t easy to reproduce and securing a good business model will definitely help. An example of a company that wasn’t successful in this sector is Reach Robotics, a company looking to provide an augmented reality experience app to users, but their simple idea was just not able to compete with giants like Facebook’s Oculus which provided a more complete virtual reality experience. Unique, original ideas in a startup can help ward off against this pitfall.
Lack of Market Need
In order to be successful and stay successful long-term, you have to satisfy the market. There is no supply without a demand, and if enough people aren’t interested in your product, then there is no reason for it. Reasons for lack of satisfaction in the market could be that someone is already solving a solution that you’re trying to solve or that it’s simply a poorly developed idea. Quibi, a streaming service that was able to raise $1.8B fell this failure because there just wasn’t enough demand for yet another streaming service, especially not when Netflix, Hulu, Disney+ and others did it better. And yet again, this is another prime example of an idea that may just be too simple for a highly competitive market.
A startup is nothing without cash to pay employees, fund research, and invest in your idea to expect a return. Not only having money but being able to manage it appropriately can be very challenging in a big startup with lots of sectors, and you have to try your best to not burn through cash. Darqi, another augmented reality startup lost $250 million to their startup as they weren’t able to find new investors to support their idea, and with competition from other headset makers, the company was doomed for failure. Money makes the world go ’round, and it’s what’ll help your company be successful.
In summary, no startup that fails falls into just one of these failures, but by understanding them and learning from the mistakes of others we can avoid these failures for ourselves. Your idea can not be too simple, it has to satisfy the market, it has to be original, and you have to keep your money in check. Without these things, a startup, no matter how dedicated or motivated a team might be to make it a reality can fail in the blink of an eye.