The last 2 years witnessed a significant number of startups attracting millions of dollars in funding because of their disruptive business models. Their valuations have surged immensely, but many of them are now in trouble.
CNN+ debuted on March 29, 2022, and shuts down in just one month on April 30, 2022. Another startup, Fast shuts down after burning $10 million per month and raising $102 million in series B led by Stripe.
Even though failure can be painful to swallow, it can also be a great teacher. An entrepreneur’s biggest disappointment is to see their hard work go to waste. Positively, you don’t know what works if you never fail.
Today, we are going to discuss the reasons and the mistakes behind the startup failures, and most importantly, what you can learn from them.
- Why Do Most Startups Fail?
- Startup Failure Rate by Industry
- Startup Success Rates & Growth
- What can the new startups learn from the Failures?
Why Do Most Startups Fail?
Startups are usually small and agile, and they can take many forms. Some startups sell products or services to other businesses, while others are only interested in the end-user market.
The most common reason why startups fail is that they run out of money. There are many reasons why a startup might not have enough money to keep going.
The most common one is that the business idea was never viable in the first place and there was no way it would be able to generate enough revenue to cover its costs.
Another common cause for running out of money is when a startup has not been able to raise enough capital from investors, which can happen if the investors don’t believe in the startup.
Some of the most common reasons include:
- Lack of capital
- Poor market research
- Failure to pivot as needed in response to changing market conditions
- Lack of a sustainable business model
- Inability to scale up operations as needed due to lack of funds
In 2022, where fuel prices are rising, 2000 dot-com bumble seems to be knocking on the door again, and many industries, majorly the tech is struggling the most, what do you think which other industry will face challenges?
Well, let us discuss it further in the blog.
Startup Failure Rate by Industry
A study by CB Insights shows that the failure rate for tech startups is as high as 90% and this is not just a Silicon Valley phenomenon. The same study also shows that the failure rates for other industries are much lower.
The reasons for startup failures vary from industry to industry. In the case of fashion, it is often because of a lack of funding. In the case of food and drink, it is often because of market saturation and competition.
Let’s dive deep.
Business failure rates of some industries with examples and reasons:
- 19.4% of professional, scientific and technical services fail in their first year
Quirky collected $169.5 million in the capital soon after starting in 2009.
Due to its business model and a product that performed poorly, the startup failed and sold for $4.7 million.
- Around 12% of startups working in real estate, rental and leasing industries won’t last after a year.
WeWork, valued at $47B at the start of the year, sold a majority stake to SoftBank, its top investor, in a rescue deal that valued it at $8B – a decline of $39B in just over 9 months.
WeWork’s fall was attributed to a variety of factors, including a rapid expansion on an unsustainable business model, questionable deals, and Neumann’s erratic behaviour.
- Only 88.4% of arts, entertainment and recreation startups make it to the second year.
CNN+ debuted on March 29, 2022, and shuts down in just one month on April 30, 2022.
First, the biggest streamer in the game (Netflix) reported its first decline in subscribers in a decade. Furthermore, it was incompatible with the plans of the new management following WarnerMedia’s merger with Discovery in early April.
- In the finance and insurance industry, 16.4% of startups fail in their 1st year.
ScaleFactor put its failure on the Covid-19 pandemic, which had backed it with $100 million from different investors. However, ScaleFactor was in trouble much earlier than the pandemic.
Their main focus was on costly marketing strategies rather than meeting the needs of their customers.
- Food service industry (including restaurants), 15% fail in the first year.
One of the startups offering consumers 15-minute grocery delivery is Fridge No More shuts down after raising $15 million in funding last year.
The startup offered fast delivery with no fee regardless of the size order. Also due to an unexpected lack of funding and an inability to close the sale.
Startup Success Rates & Growth
Now that we have discussed the industry’s failure rate, let us now discuss the success rates and growth of startups.
- Mines have the highest five-year survival rate for new businesses, at 51.3%, according to the US Census Bureau.
- The probability of success for business owners who have previously run successful businesses is 30%.
- Business owners with success admit they have the right qualifications and experience to run a company on a limited budget 82% of the time.
- It is crucial to attend to your customers with the intention to help since 14% of startups fail due to ignoring customers’ needs.
- With revenue of $36.3 billion, healthcare startups are the top industry in the U.S.
What can the new startups learn from the Failures?
Startups are risky, and many fail. No one can predict what will happen in the future, but every one of us can learn from the past to get success.
Here are a few lessons from startup failures that will help you avoid making the same mistakes as other companies.
- Know your customer and your competition
- Learn how to pivot
- Find the right team for your startup
- Stay focused on the product and don’t lose sight of the goal
- Be realistic about what you can achieve with limited resources
- Create a strategy to measure success or failure while avoiding vanity metrics
The startup ecosystem has not seen a slowdown like this in the last 5 to 6 years. The reality is that investors now believe that the days of easy money or Unicorns are over and startups must show a clear path to profitability (try to become like Camels) instead of just growth. If you are a startup or have already started your venture, try to learn from the other’s mistakes as well.
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