The startup journey is not for the faint-hearted. Pondering how many startup businesses fail in the first year is a prudent thing to do at pre-launch. This startup survival guide outlines the most critical startup failure statistics to keep in mind when planning your launch.
First, we’ll delve into the whats and whys to understand what makes startups fail. Also, failure can be an ambiguous term - what's considered a failure for some might not necessarily be for others. We’ll help you draw the line so you can quickly identify the early warning signs. You’ll also get a crisis management playbook in case you run into rough terrains.
Buckle up; it's a bumpy ride ahead.
Let's get started.
Failure is an intrinsic part of the startup ecosystem. With so many critical moving parts, it’s easy for founders to get caught up in pitfalls or missteps.
A few common causes are behind most startup failures. To succeed as a founder, you must learn to prioritize these issues while navigating those peculiar to your case.
Skynova, a small business invoicing platform, did a study in 2022 that suggests that a lack of financing is behind a whooping 47% of startup failures. Economic uncertainties, recession fears, and a 63% plunge in North American startup investments have all strongly impacted the current capital crunch.
However, in some cases, failure is avoidable even when there’s a tough funding environment, but only if a tight financial plan is in place. Founders need to strike a delicate balance between financial planning and funding availability.
Skynova's study also revealed that an astounding 58% of founders wished they had invested more time in market research before setting sail. Take a cue from defunct companies like Nigeria’s DeadDey, which dived headfirst into a market that was not ready for it. Or Mxit, which got crushed by the rise of other more fitting platforms. These businesses were blindsided by nuances and shifts in consumer behaviour.
Besides responding to evolving customer needs, founders must make timely adjustments in several other areas. Skynova's survey supports this by showing that, among founders who have successfully pivoted, 75% believe that it contributed significantly to their startup’s success.
In a CNBC interview, Kevin O’Leary of the investment hit series Shark Tank said that most of the failed startups he funded had one common problem: founders unable or unwilling to make timely changes. "They can't get out of their own way," O'Leary said. "They won't listen to anybody else."
Leadership crisis is also a common theme in collapsed startup stories. CB Insights traces 23% of startup failures to leadership issues. We’ve seen these leadership crises play out in cases like Nigeria’s Efritin, allegedly run down by a rogue manager, and OyaPay, embroiled in a family feud.
Startups face many common adversaries, including poor financing, targeting the wrong market, and leadership gaps. Successful startups thrive because they’re nimble, financially savvy, and have a finger on the pulse of their target market. To gain further insights into the criteria for startup success, let’s zoom in on some interesting startup failure stats.
Knowing some key startup failure statistics can help founders increase their chances of success
About one in five startups will fail in the first year. Eventually, 90% will close shop. Even unicorns, startups that manage to reach stratospheric valuations, eventually go bust 99% of the time. And only 1% of startups are ever valued at $1 billion or more. Disruptive companies that threaten to take their industry by storm also have a ninety-plus percent failure rate.
Now, access to financing is a perennial problem for startups. A multi-year study that ended back in 2018 suggested that cash flow problems drove 82% of closures. The trend continues until today, with many studies naming funding as the number one problem for struggling startups.
Poor ideation or market research is also rampant, with studies showing this stage is often rushed or misconstrued. Finding a product-market fit takes 3X more time and effort than most founders estimate, and they overrate the value of their idea by 255% on average.
Here are other interesting stats to keep in mind:
The grim reality of startup failure stands bare. A staggering 90% of startups don’t survive past a decade. Even being a unicorn or disruptor doesn’t exempt a startup from high risks of failure. Founders often underrate or miscalculate the risks, blindsided by their own theories and oversight in certain sensitive areas.
Here’s more on startup failure rates to shed more light on the issue.
Now, let's dissect the failure rates and success patterns across sectors. Each sector poses unique challenges. We’ll look at the inherent pros and cons of each one.
The global eCommerce industry processes $3.5 trillion in sales annually. However, the vast potential is only matched by the cut-throat competition. The industry has one of the highest startup failure rates - only 20% ever make it past the first few years.
Fintech boasts one of the highest growth potential, and access to funds is more likely here. However, post-funding failure rates are among the highest, at 75%. Cryptocurrency apps, investment apps, and mobile banking apps are among the hordes of these failed companies, and most go bust after securing one or more rounds of funding.
HealthTech faces a daunting 80% failure rate. The challenges here go beyond funding or technology. There are regulatory bottlenecks and a cultural reluctance towards medical technology platforms.
Edtech startups are slow and steady and don't normally have stratospheric growth projections. Their 40% success rate, nearly double that of most fast-growing industries, proves this. The global edtech industry receives over $20 billion in funding yearly.
Failures here mostly result from rushed success strategies, ineffective marketing, poor revenue models, and inappropriate technologies that undermine efficiency in various aspects of a startup.
The failure rate for food tech is also believed to be high, around 70-90%. Startups here often grapple with everything from generating high order volumes to making timely deliveries and regulatory compliance.
Failure has a negative connotation. But in the world of startups, the definition is usually not that straightforward. People often use the term failure to describe companies that declare bankruptcy, shut down operations, or sell off assets. But if you look closer at these circumstances, they’re not always harbingers of doom.
A startup deemed a failure might only be undergoing an evolution. The business owners can reimagine their idea, redefine their strategy, and pivot their operations to a new business model. All of this can blur the lines of conventional failure. Uber and Amazon, giants today, navigated prolonged periods of financial uncertainty before achieving success. Uber, for years, burnt through capital without immediate profits while focusing on market dominance. Amazon famously operated at a loss for nearly a decade, prioritising expansion and technological innovation over short-term gains.
Airbnb faced early rejections, struggling to gain any form of traction for years. However, strategic funding and an unwavering commitment to its vision turned the tide. In other cases, founders have averted potential failure through mergers, acquisitions, and strategic partnerships.
These stories exemplify that setbacks are part of the entrepreneurial journey. Failure can open up a path to a successful business in many ways, including leading to strategic decisions, technological breakthroughs, and market adaptations.
The startup journey poses different sets of challenges at various stages. Let’s look at some stats on the specific challenges of each startup stage, including the number of those who fail to make it to the next stage:
Roughly 60% of pre-seed startups fail to make it to seed. With the superficial nature of startups at this stage, the major issues are inherently related to clarity. Pre-seed founders often struggle to validate their hypotheses and define their business model. And among those who manage to gain some pre-launch traction, many often fail to adapt or pivot based on early feedback.
Nearly as many businesses fail at seed as pre-seed. Cash flow issues and product-market dissonance often prevent founders from scaling their business ideas.
35% of companies that get Series A funding do not make it further. The drive to scale quickly often blinds founders to the fundamentals and market dynamics. Inefficient use of funds and weak leadership also plague startups at this stage.
There’s only approximately a 1% chance of failing after Series C. The risks decrease significantly, though mature startups still face challenges of sustaining innovation and fending off competition.
Startup failure rates have wide implications for the startup landscape, shaping funding trends, impacting entrepreneurial drive, and even informing regulatory policies. Investors can become a reflection of their time - cautiously optimistic and more meticulous during lull times and more freehanded and even casual in their approach during happier times.
A cautious investor community may result in heightened scrutiny during funding rounds, demanding more robust proof of concept and a clearer path to profitability. This can become a dream killer for riskier yet potentially groundbreaking ventures.
On the founders’ side, high failure rates might discourage aspiring entrepreneurs from leaping into startup ventures. The result could be a scarcity of fresh ideas and a dent in the dynamism and vibrancy that emerging startups bring to the business landscape.
Expert tips can help founders keep failure at bay.
Finally, some positive news. You can still salvage something remarkable from a business that is circling down the drain.
To maximize your chances of success, keep these non-negotiable tips in mind:
Comprehensive market research gives startups a firm footing. To perfect your product-market fit, dive deep into the world of your target audience and dissect prevailing and upcoming market conditions. Take a cue from Copy.ai, where the founders could sniff the A.I revolution from miles away and position themselves for exploits with automated creativity tools.
A startup's strength lies in its leadership. Develop effective leadership skills and curate a team that complements your strengths. Embrace a culture of collaboration and innovation, empowering every team member to contribute ideas and solutions.
Successful founders exercise financial discipline from the outset. Develop a realistic budget and monitor cash flow meticulously. Allocate resources judiciously. Prioritize essential expenditures and be prepared to pivot if financial challenges arise.
Startups operate in a dynamic business environment that has many moving parts. Adaptability is critical. Stay attuned to market changes, customer feedback, and emerging trends.
Here are some strategies to keep it all together when the going gets tough:
Financial independence should be the number one operational priority of your startup. Diversify revenue streams to reduce dependence on a single source. Judiciously leverage cost-cutting measures, considering long-term sustainability. When weighing fundraising options, always seek professional advice.
Focus on initiatives that will help you stay aligned with evolving market needs. Be ready to pivot your product or service offering based on emerging customer preferences and the competitive landscapes. Establish open channels for customer feedback to gauge market sentiment. Communicate changes transparently to your employees and stakeholders, highlighting the value proposition of the adapted offering.
Plan for unexpected leadership changes by nurturing a leadership pipeline and implementing cross-training. Clearly document key processes and decision-making frameworks to ensure a seamless transition in case of leadership turnover. Soothe nerves by reassuring the team and stakeholders of a clear vision and strategy in times of leadership flux.
Rather than deter entrepreneurs, our examination of startup failure rates is meant to illuminate the path ahead. Yes, challenges abound. But they can become the raw material for success. Embrace failure as a lesson, refine your approach, and persist with unwavering determination.
Each setback is an opportunity to pivot, innovate, and redefine your strategies.
Need more expert guidance to navigate a rough business terrain? Seasoned startup experts are happy to provide you with more insights. Let's hear from you today!
