We analyze 110+ business failure post-mortems and list the top causes of startup failure, ranging from poor product-market fit to team strife.
One of the most common requests we received after compiling our list of startup failure post-mortems was to utilize these posts to identify the primary causes of startup failure.
Startups, businesses, investors, experts in economic growth, academics, and journalists all sought answers to the following query:
Why Do Businesses Fail?
So, to test if we could provide an answer, we gave those post-mortems the CB Insights data treatment.
Since 2018, we’ve examined 111 post-mortems, and we’ve discovered that most startup failures are caused by a combination of factors. We did, however, start to see a pattern in these stories.
So, after examining the post-mortems, we determined the top 4 causes of startup failure.
You’ll notice that the chart listing the main reasons for failure doesn’t add up to 100% because many firms provided various explanations for why they failed (it far exceeds it).
The chart is followed by an explanation of each factor and pertinent post-mortem instances.\
Reason 1: Market Problems
The issue of a small or nonexistent market for the product a company has developed is one of the main causes of business failure. Here are a few typical signs:
- The value proposition or event is not strong enough to persuade the buyer to make a purchase. Good salespeople will advise you to seek out customers who are “hair on fire” or “in extreme pain” if you want to succeed in today’s competitive marketplace. Additionally, you hear individuals discussing whether a product is an aspirin or a vitamin (good to have) (must have).
- The timing of the market is off. Your market might not be ready for your specific solution yet because you are a few years ahead of them. For instance, when EqualLogic originally introduced its solution, iSCSI was still in its infancy. To propel their market forward, it took the introduction of VMWare, which needed a storage area network to support VMotion. Thankfully, they had enough money to get through the initial years.
- The market for those who are in agony and have money is simply too small.
Reason 2: Failure to Fit in Market
A product that does not fulfill the needs of the market is another reason why businesses fail. This might be because of straightforward execution. Another possibility is a failure to create Product/Market Fit, which is a far more strategic issue.
Most of the time, a startup’s first product won’t fill a demand in the market. The best-case scenario is that it will require a few changes to achieve the ideal product/market fit. In the worst situations, the result will be incorrect, necessitating a full rethink. If this occurs, it is a blatant sign that the team didn’t put in the effort to test their concepts with actual clients both before and throughout development.
According to our observations, it typically takes 50 discussions with strangers who are potential clients to determine whether a new idea would be profitable. Unfortunately, most founders come from technical or product backgrounds, thus they avoid doing 50 cold outreaches to customers since they feel it too awkward to do so before beginning to develop the product. That is very unfortunate since they won’t learn the input till after they have developed the product, by which time it will be too late to include it and many months will have been wasted.
Reason 3: Failure to find a Scalable Sales Motion
According to our observations, it typically takes 50 discussions with strangers who are potential clients to determine whether a new idea would be profitable. Unfortunately, most founders come from technical or product backgrounds, thus they avoid doing 50 cold outreaches to customers since they feel it too awkward to do so before beginning to develop the product. That is very unfortunate since they won’t learn the input till after they have developed the product, by which time it will be too late to include it and many months will have been wasted.
Reason 4: Poor Management Team
An extremely prevalent issue that contributes to startup failure is a poor management team. A wise management group will steer clear of factors 2, 4, and 5. Poor management teams commit errors across the board:
- They frequently lack strategy, resulting in the creation of a product that no one wants to purchase since not enough effort was put forward to test the concepts both before and during development. This may also apply to poorly planned go-to-market strategies.
- They typically lack execution skills, which results in problems with the product being developed incorrectly or late and ineffective go-to-market strategies.
- Below them, they will construct feeble teams. The adage “A players hire A players; B players only get to hire C players” is well-known and true. This is because B players don’t want to work for other B players. As a result, the company will become weak, bad execution will be widespread, etc.
