Nine in 10 startups fail, and analyses of the aftermath of these failures continue to yield some common causes. The most prevalent of these: no market need.
That’s a euphemism for something much harsher sounding: Nobody wanted the product or service. That was cited as a reason for more than two out of five startups’ failures.
The second-most prevalent reason for startup failures may hit really close to home for readers of this blog: Nearly three in five run out of cash.
That comes from an analysis of 101 failed startups’ postmortems, conducted by CB Insights.
Why Do So Many Startups Fail?
These two causes largely recur in the other analyses of startup failures you might find. And lack of market need ranks first in nearly all of these lists, which makes this topic worth extra consideration.
Namely, why do so many startups put out products and services that no one wants to buy? Are these companies doing insufficient market research? That’s one of the implications of “lack of market need.”
Historically, startups have faced somewhat of a chicken-and-egg problem when attempting to do market research — that is, to figure out whether there’s a market for your product and whether any competitors are already serving it.
Stealth Mode Issues
When you’re operating in stealth mode, most likely any would-be competitors are also working on the down-low, so you can’t know with any certainty whether in fact no one else is doing what your startup is doing — until it’s too late.
This problem may have peaked during the dot-com boom of the early aughts, when venture capitalists used to throw tens and even hundreds of millions at mere ideas; and by the time anything was in an alpha or beta test stage, all of a sudden you’d have a dozen companies professing to be the first to do the exact same thing.
Since then, it’s gotten easier for startups to learn whether there’s demand for their product or service. In recent years, crowdfunding platforms Indiegogo and Kickstarter have been evolving into a way for startups to sell first-generation versions of their products and services. Using these sites in this manner allows new companies to test whether there is “market need” and get vital feedback on anything amiss.
Funding Success Does Not Equal Business Success
However, running a successful (crowd-) funding campaign is no guarantee that a startup might succeed, according to some of the analyses of startup failures. In fact, CB Insights points out that 97% of the startup failures it analyzed had successful funding campaigns, either via the crowd or other methods.
The head of one of these failed startups had explained to CB Insights, “Startups fail when they are not solving a market problem” in a universal or scalable way. Another of the analyzed companies’ executives had said, “we had no customers because no one was interested in the model we were pitching.”
This suggests that more startups ought to consider doing focus groups as part of their product development. And if the results of the focus groups indicate anything needs to change, the company would need to be willing and able to pivot quickly to accommodate that feedback — lack of agility in this regard is cited as another common reason for failure.
Try Doing Focus Groups
A number of the other causes of startup failure might be remedied by doing more thorough market research as well, especially when focus groups are part of it.
These endeavors might inform how to make products more user friendly, how to compete with other companies more effectively, set better prices, optimize business models, market the products and services and even hire smarter.
Of course, hindsight is 20-20, and it’s possible that a lot of these issues can’t be figured out until it’s too late. Nonetheless, it can’t hurt to make yourself aware of the causes of startup failures so you don’t get blindsighted by the challenges.
So, fellow entrepreneurs, what kind of insights have you gotten about your own projects from reading about the causes of startup failures? What do you intend to do to prevent these issues from wreaking having upon your own venture?
Jackie Cohen is an award winning financial journalist turned turned financial advisor obsessed with climate change risk, data and business. Jackie holds a B.A. Degree from Macalester College and an M.A. in English from Claremont Graduate University.