The 10 Biggest Reasons Startups Fail

The prospect of investing in private startups is undeniably exciting. Imagine finding the next big thing before it becomes the next big thing. The rewards can be immense for early investors — even putting to shame the incredible returns that can be achieved through investing in already-public businesses.

But if every startup lived up to its full potential, we’d have gaggles of billion-dollar businesses creating untold weath for millions of investors. To the contrary, around 90% of startups fail within their first five years. And among those that actually attract investors’ hard-earned capital, over two thirds will never deliver a positive return to stakeholders.

So what’s a prospective investor to do? To avoid putting your money to work in such failures, you need to be aware of the reasons they fail in the first place.

To that end — and in a very non-scientific, but roughly appropriate order — here 10 of the biggest reasons startups fail:

1. They run out of money

According to CBInsights, more than 40% of startups fail due to a lack of financing. Whether it’s poor financial planning or a lack of access to sources of capital, many potentially great businesses start out burning hoards of cash without any reasonable path to profitability. Then they simply fold when they no longer have the cash to continue funding their growth ambitions.

This is a problem that was partially remedied in 2020 when new crowdfunding rules were put into place enabling startups to raise as much as $5 million — a massive increase from older limits of $1 million.

But in the absence of astute capital management, many promising startups have failed (and will continue to fail) after running out of money, plain and simple.

2. No market need/Bad market timing

Even with a fantastic product, it’s difficult for a startup to survive if it’s entering a market that either 1.) doesn’t exist, or 2.) doesn’t support the unit economics required to achieve sustained, profitable growth.

Sometimes it’s simply a case of bad market timing, as a startup’s perfectly strong product might be ahead of its time. But according to CBInsights, around 35% of startups fail because their product has no market need.

It’s extraordinarily difficult to disrupt an existing market, and even more challenging to carve out an entirely new market for a product prospective customers didn’t want or need. If a given startup claims it’s attempting to do just that, it should merit a critical eye. This point speaks directly to the “Large Market” (the “L”) aspect of my B.L.A.S.T. investing framwork.

3. Competition

Rarely does a startup enter a market entirely absent of capable competitors. To be clear, many industries have room for multiple winners. But the natural challenge of competition is like Darwinism at its finest; only the strongest startups with a superior product, exceptional leadership, and incredible market fit survive.

There’s nothing quite like a capable, well-funded competitor to throw water on a promising startup’s fiery growth story.

4. Flawed business model

Often flawed business models can be distilled down to ineffective pricing strategies for a given product — particularly when that pricing doesn’t mesh with the value received by consumers.

Perhaps a company has overpriced its product, for example, in an attempt to achieve sustained profitability too quickly. Or maybe a business has underpriced its product to the extent it could never realistically turn a profit — only to limit its ability to raise prices down the road. Maybe a startup launches a subscription product at a price that simply doesn’t justify its value proposition, and the churn of such a product is far too high to generate sustained growth over the long term.

In these cases, the more detailed a business model the better as I work to analyze its prospects. This also speaks to the Sustainable Growth (“S”), “Large Market” (“L”), and Transparent Operations (“T”), pieces of my B.L.A.S.T. framework.

5. Regulatory/legal challenges

While tech industry juggernauts often find themselves in the crosshairs of regulators (typically of the antitrust variety), rarely does a startup face the same challenge. But in the abesence of patent protection or valid intellectual property established for a given product, legal challenges (especially from competitors or so-called “patent trolls”) are far too common.

Keep your eyes peeled, then, for any intellectual property in place that might solidify your chosen startup’s product and market position.

6. Fraud

Unfortunately, fraud happens. It could come in the form of theft or money laundering, or — as in the ongoing case of Theranos — fraud could arise amid false claims involving the capabilities of a startup’s product.

In either case, the “fraud” aspect also speaks directly to the “Transparent Operations” (“T”) piece of my B.L.A.S.T. framework. Though somewhat subjective, I’m looking for startups run by trustworthy leadership teams I believe will do right by all stakeholders, including the company, its employees, its investors, and its customers.

7. Poor product

This is a challenge that arises too often in the world of startups, but is most common with businesses raising money in their early/pre-seed stages — that is, companies seeking to raise capital to begin developing products in exchange for equity in the business.

Sometimes the product that ultimately gets developed from pre-seed funding is poor. That’s not necessarily a death knell for said startups — as the product can be improved with later iterations — but it’s definitely a red flag if the first iteration of a product is a far cry from what investors and customers had envisioned.

8. Inability to pivot/expand

Some of the greates businesses in the world only found their strides after pivoting their product and/or business model from earlier versions. This speaks directly to the “Adaptable Management” aspect (the “A”) of my B.L.A.S.T. framework.

My kids didn’t believe me, for example, when I told them Netflix (NFLX) wasn’t always a video-streaming service, but previously only delivered DVDs to our mailbox.

Amazon (AMZN) started as a lowly online bookseller before morphing into the e-commerce and cloud-computing juggernaut we know and love today.

iRobot (IRBT, being acquired by Amazon) CEO Colin Angle once told me he went through dozens of failed robot ideas before finally honing his focus on the home-robotics niche with the company’s Roomba robotic vacuums.

Slack (now owned by Salesforce (CRM)) started out as a video-gaming site before pivoting to become one of the world’s largest messaging platforms.

AirBnB (ABNB) began as a platform to let people rent extra space to travelers with a focus on work conferences — even including air mattresses in spare rooms (hence the name) — before realizing the model wasn’t sustainable and pivoting toward whole apartment and home rentals.

In the world of startups, the ability to recognize when a pivot is appropriate is absolutely critical.

9. Inexperienced management

Startup founders don’t always need to have deep expertise and experience in the markets they’re seeking to carve out or disrupt. But it certainly helps.

In this case, the phrase “You don’t know what you don’t know” comes to mind.

Sometimes having founders enter an industry with an outsider’s perspective can be an invaluable asset — particularly so when that perspective is complemented by other members of the leadership team who do have experience.

I’m reminded of publicly traded insurtech leader Lemonade (LMND), for example, whose co-founders Daniel Schreiber and Shai Wininger came from technology backgrounds but notably lacked experience in the insurance industry. However, they enlisted the help of several insurance industry veterans to help them build a business meant to disrupt legacy insurance as we know it — including Ty Sagelow, who authored the book “The Making of Lemonade” (well worth a read, by the way) — negating the risk of inexperienced management.

Lemonade is thriving today. But had they attempted to muscle their way into the insurance business without the guidance of experienced management, I’m confident they wouldn’t be where they are today.

10. Bad partnerships

Finally, keep an eye on the terms of your potentially investable startups’ partnerships — whether they’re suppliers, customers, technology partners, or even other stakeholders. Sometimes cerrtain partnerships or unique shareholder agreements are unfavorable to the startup. Or perhaps a large individual investor who believes they know better could opt to take more of an activist investor approach to influence the direction of the business — much to the detriment of everyone else involved.

Sour partnerships can be hard to spot and often require digging into the nitty gritty of regulatory filings. But there’s nothing quite like a bad partnership that can so effectively poison a well filled will previously drinkable startup waters.

Keep your eyes peeled

In the end, this is hardly an exhaustive list of the top reasons startups fail. I’ll also admit there’s a high level of subjectivity when it comes to determining how likely any of the above reasons will actually apply to a given startup.

But if you’re thinking about investing in a startup, merely being aware of these reasons startups fail can go a long way toward helping you identify the signs before it’s too late.