Why Do Startups Fail?

Shattered light bulb.

We often hear the success stories of startups or “unicorns” that catapult themselves into immense wealth and professionalism — all by launching a startup. But, the reality is only 1 out of 12 startups are successful. The majority of startups, unfortunately, fail. As an entrepreneur, you can prepare for the challenges that may lead to failure by understanding why startups fail and how to prevent startup failure before you start.

Reasons Startups Fail

Lack of Market Demand

Unfortunately, a great idea doesn’t always result in a big enough market. Unlike small businesses such as grocery stores or florists that have an established market, startups are in the unique position of needing to generate a market for their products in order to survive.

Many startups will fail because there simply isn’t a big enough market for their product or service. This is when a pivot in the business model would need to take place in order to attract a larger, more diverse market.

Customer Neglect

Growth and expansion is a priority for startups, and scalability is perhaps the biggest difference between startups and other business types. Scaling a startup can also be detrimental to a startup’s success, however, if it comes at the cost of neglecting existing customers.

Focusing on your customer’s wants and needs is essential to pivot the business model in order to keep existing customers while attracting new ones as well — a balance required to maintain the success of your startup.

Not Enough Research

Whether it is research about the product, consumers, legal requirements, or another important aspect of your business, inadequate research not only makes operating your business more difficult — it can lead to its closure. For many entrepreneurs, lack of research isn’t a result of laziness but rather not knowing all of the aspects that need to be researched or simply not having the time.

Funding Issues

Between not securing enough funding and not spending funding wisely, issues surrounding startup financing are the downfall of many startups. With such a high failure rate, securing the funding for your startup can be difficult if your business doesn’t have a scalable, innovative idea with high growth potential. Furthermore, many startups aren’t realistic about the amount of money they need in order to successfully launch and maintain their startup during the early stages. All of these factors contribute to funding issues and drain the company’s resources and potential.

The Wrong Team

Just because you have a staff of experienced employees does not mean you have the right team for your startup. Many startups fail because they don’t have a team they can trust to uphold the company’s mission or take the necessary steps to maintain a forward trajectory. Regardless of the individual’s unique skill, the entire team needs to collaborate well together in order to support the success of the company.

Poor Marketing

Many startup founders are exceptionally skilled at specific aspects of launching a startup, such as building the product or acquiring the necessary funding but their marketing abilities fall short. When it comes to developing an effective marketing strategy, they are unable to deliver.

This could also manifest itself in additional ways, such as not understanding your target market and therefore developing marketing strategies that don’t appeal to enough customers to support your business. Being able to promote your product is essential to a successful startup, and unfortunately, one of the reasons many startups fail.

How to Prevent Startup Failure

Conduct Extensive Research

Before you launch your startup, the amount of research you should do is extensive. Everything from requirements to legally form your business to how to appeal to your target audience needs to be thoroughly researched. If you aren’t able to conduct adequate research yourself, consider hiring a professional service to help you accomplish some of the more complicated and time-consuming tasks, such as forming your business or accounting.

Save Money

No matter what your budget is, saving money for your startup is not only possible — it is absolutely necessary. Creating a budget and sticking to it is a great place to start in addition to utilizing free tools and resources that help you manage your finances and break bad money habits. With funding a primary reason for startup failure, you can’t afford not to save money and learn the ins and outs of effectively managing your finances.

Test Your Idea (Market Validation)

Too often, startups fail because entrepreneurs don’t validate a startup business idea to ensure there is a market for the product. The truth is no matter how great your startup idea is, it needs to be put to the test. Market validation can give you insight into whether your startup idea can generate the market it needs to avoid failure as well as ways you may be able to pivot the business model to attract a large enough market.

Listen Closely to Your Customers

Your startup is based on your vision; however, it needs to appeal to a large customer base and meet the demands of the market in order to survive. Listening closely to your customers’ feedback benefits you in two ways: your customers feel more heard and seen by your company and you receive helpful feedback that can help your startup pivot to attract a larger audience.

For example, if you continue to spend money optimizing your product to offer features you think are great without taking note of what the market is interested in, your tunnel vision could end up costing you time, money, and potentially — your company.

Build the Right Team and Support System

As we mentioned before, having a team of experienced hires doesn’t equate to the right team for your startup. Developing a strong hiring plan that will attract appropriate candidates and help you rule out potential hires that may not suit your company culture is the best way to build a great team.

Additionally, focus on growing your startup’s support system. Whether this is your partners, contractors, hires, or simply the people you surround yourself with. A strong support system can help keep your startup afloat while you’re navigating through tumultuous times by providing you with the encouragement and support you need to be successful.

Create a Comprehensive Marketing Strategy

Many entrepreneurs that don’t have experience in marketing can feel overwhelmed by the prospect of having to promote their product or service. But, regardless of your comfort level with promotion and marketing, you need to create a strong, comprehensive marketing strategy that will attract your target audience in order for your startup to succeed. Whether it involves adding a marketing professional to your staff or taking marketing courses as you are able, utilize a marketing service or simply research free resources available to you.

Use the Startup Resources Available to You

One of the benefits of starting your own startup today is that you have access to a litany of startup resources created to make starting, operating, and managing a successful startup more attainable than ever before. For entrepreneurs especially, the more resources and information you are able to use, the more likely you are to handle the inevitable challenges that come with owning your own startup.

Whether it is reading guides such as our How to Start a Startup guides or finding the best startup resources available in your community, there are many resources to prepare you for the challenges of entrepreneurship.