Startup Failure Rates
Running a startup company and successfully growing it into a long-term business is an incredibly challenging endeavor.
The founder has to establish product-market fit, show that their target market is willing and able to pay for their products and services, develop a minimum viable product (MVP), and hire employees to assist with the company’s growth.
Whenever one or several of these factors don’t line up, or the founder isn’t able to implement a workable solution, the startup company often goes under.
Out of all startups that are formed, 9 out of 10 startups end up failing. While a 90% failure rate is incredibly high, it can be overcome if the founder is equipped with the correct tools, knowledge, and growth strategy.
Out of all venture-capital-backed startups, approximately 7.5 out of 10 fail. This data comes from Shikhar Ghosh, a senior lecturer at Harvard Business School who researched startup failure rates.
Out of all new businesses that are formed annually, 2 out of 10 fail within their first year of operation. This data is provided by the United States Bureau of Labor Statistics (BLS).
Even though these failure rates seem incredibly high, it’s important to interpret this data in the right context. If you adjust your startup’s strategy to learn from the mistakes of others and avoid falling into similar pitfalls, your startup will be much more likely to succeed.
In the next few sections, we’re going to describe why startups generally fail, and what you can do to prevent your startup from failing.
Why Do Startups Fail?
Startup companies in their earliest stages of development can fail due to a wide variety of factors, and it’s important to understand what the underlying causes are to learn from them and adapt.
Generally, when we refer to startup companies, we are describing a new business that aims to rapidly grow or innovate upon a product, service, or marketplace. This can be seen as a “business experiment” of sorts, where the startup tries to break into a new space and bring their new ideas or innovations to life in the fastest way possible.
As you can imagine, the experimental nature of this innovation doesn’t always “click’ with the target market, and if the startup company doesn’t pivot in time or adjust its approach, it can be prone to failure.
Listed below are some of the most common reasons startups tend to fail early. If you pay attention to these areas in your own business, you’ll be much less likely to repeat the same mistakes.
One of the most common mistakes startup companies make is with their marketing. This was one of the biggest “startup killers” for early-stage companies, especially if they invested a lot of time and money into marketing before determining product-market fit.
The most important goal of your startup, in the beginning, is to validate your product or service with your target market and make extra sure that the people you’re selling to want and need your offer.
Instead of pouring hoards of cash into advertising, take a step back and see how you can validate your product in a quick and cheap way. By validating your assumptions early on, you’ll avoid the biggest mistake most startups make and actually put your marketing and advertising cash to good use.
Hiring the Wrong People
Your startup’s initial team is the lifeblood of your business, and hiring the wrong people can be a large blow to any fledgling company. When hiring in the very beginning, you have to be absolutely sure that your hiring process is weeding out anyone who isn’t absolutely dedicated to your vision and idea.
Hiring a team that lacks technical knowledge, lacks marketing skills, or lacks domain knowledge in your space isn’t helpful to your future growth and advancement. Take the extra time and effort required to ensure that your team is motivated, has a similar vision for your company, and works well together.
Once a startup has verified its initial idea and started scaling, financing problems have the potential to cause projects to “fizzle out.”
If your company is on pace for rapid growth but doesn’t have the company to scale to the demand received, it can result in having to shut your doors for good.
While this is one of the least common reasons for startup failure, problems can arise when a startup over-invests in technology (i.e., programming and development talent) in the very beginning before they have validated their product or service with their target market.
By over-investing in technology, in the beginning, these startups build something their target market doesn’t actually want or need, resulting in failure and zero sales.
How to Prevent Your Startup From Failing
We’ve covered some of the most common mistakes startup companies make that result in their failure, but what can you as a founder do to prevent your own company from falling into the same fate?
Out of all of the possible mistakes out there, there are two incredibly common and important “startup killers” that can easily be avoided. We’re going to explore and dive into each one of these in detail.
Always Validate and Test Product-Market Fit
This is the biggest “startup killer” of them all – not validating and testing your product or service in the very beginning before you build or create a single thing. We’ve likely all heard the adage, “Build it and they will come,” but this is exactly the mistake many early-stage companies are making.
In the real world, you should never build your product without being 100% sure that it is something your target market actually wants, desires, and is willing to pay for. If you take just one important lesson out of this section, this should be it. Come up with quick and inexpensive ways to validate demand for your product or service before you start building.
This can be done by interviewing your ideal customer and talking to them about your product. If you have a graphical representation, you can show, or even a prototype, ask them how they would use it each day and if it is something they would pay for.
We’ll reiterate once more – never jump into building your product and service or jumping into marketing before validating your product or service with your target audience. Doing this validation upfront will save you a tremendous amount of time, money, and headaches.
Take the Time to Hire Top Talent
Your team is critical to the success of your company, especially when you’re first starting out. If you aren’t extremely selective in the individuals you hire, you’ll make it less likely that your startup company will succeed in the long run.
To avoid any potential issues with employees further down the road, make sure that you’re hiring individuals who have domain knowledge in your space, and possess the technical abilities and expertise required to help you rapidly grow and scale.
Take the extra time to find people who align with your goals and vision. Doing so will help everyone get along and work together to build your startup into a long-term company that experiences continuous growth.
Other Helpful Startup Statistics for 2023
We’ve described how many startup companies fail within their first few years of operation and explored some of the common pitfalls new companies face when trying to grow their business.
In this section, we’re going to cover some additional startup statistics for this year that you should be aware of.
- According to the United States Census Bureau, mining startups have the highest first-year survival rate at 51.3%
- Founders who have previously started a successful business have a 30% chance of succeeding with their next venture. Prior success often gives these entrepreneurs the experience they need to also succeed in the future.
- Generating new business and growing their customer base is one of the biggest challenges faced by startup companies.
- According to the Small Business Administration, the startup failure rate of 90% is close to the same across all industries.
- Data from CB Insights shows that 29% of startup failures occur due to a lack of funding or personal capital to sustain growth.
Frequently Asked Questions
What percent of startups fail within the first five years?
Within the United States, it is estimated that approximately 18% of private sector businesses fail within their first active year. For businesses that make it further, the failure rate is about 50% after five years and 65.5% after ten years.
How do I know if my startup is failing?
You’ll know that your startup is failing or in the initial stages of trouble if you begin to see high employee turnover, decreased revenue, or a sudden drop-off in the number of customers or clients who purchase your products and services. This is no reason to give up and throw in the towel, however, as there are actions you can take to pivot your business back into profitability.
How long do people stay at a startup?
Most employees stay at startup companies for around two years, which is the median job tenure. Typically, employee turnover is most pronounced very early on and drops off as an employee stays with a startup over a longer period of time.
What percentage of funded startups fail?
Out of all startups that receive funding rounds, whether it is through venture capital funding or angel investors, estimates show that approximately 70% of these new startups fail after 20 months of their initial financing round.
What percentage of startups become unicorns?
Out of all of the startups and new businesses that get founded each year, becoming a “unicorn” company that grows into a potential multi-billion dollar business is extremely rare and difficult. According to the probabilities, a startup only has about a 0.00006% chance of becoming a unicorn, and this is after growing for an average of seven years.