Dr. Jan Erik Meidell
In today’s economy, startups are seen as the engines of innovation and economic growth. They embody unconventional thinking, creativity, and the pursuit of scalable business models. Yet, despite their promising nature, statistics show that around 90% of startups fail. Understanding why startups fail is critical for entrepreneurs, investors, and policymakers aiming to foster sustainable innovation. While research has often focused on what makes startups succeed, an equally important discussion surrounds the factors that lead to their failure.
The Complexity of Startup Failure
The journey of a startup is inherently risky. Unlike established firms, startups operate with minimal resources, untested business models, and high uncertainty. According to the European Association of Business Angels, about 50 million new projects are launched every year, but only a fraction survive beyond three years. Bloomberg’s analysis further confirms that 8 out of 10 startups fail within the first 18 months. The failure of startups is rarely due to a single factor; rather, it is the result of multiple interconnected challenges.
One of the earliest attempts to understand startup failure involved financial data analysis. Early statistical models such as discriminant analysis and regression were used to predict failure probabilities based on revenue, investment levels, and market conditions. More recent studies have incorporated artificial intelligence techniques, including decision trees and neural networks, to refine predictive capabilities. However, while financial models provide useful insights, they often fail to capture the human and strategic dimensions of failure.
Financial Mismanagement and Lack of Funding
The most apparent reason why startups fail is financial mismanagement. According to research, 34% of failed startups cite running out of money as a primary cause of failure. Many entrepreneurs underestimate the amount of funding needed to sustain operations until they can achieve profitability. In their eagerness to launch, they fail to secure adequate financial resources or overestimate their revenue potential.
Funding issues often arise from multiple sources: difficulty in raising capital, poor budgeting, and an inability to reach sales milestones that attract further investment. While many startups receive initial funding from venture capitalists, angel investors, or crowdfunding, maintaining financial stability requires rigorous financial planning. Poor cash flow management, premature scaling, and failure to secure follow-up funding rounds are common pitfalls that lead to a startup’s downfall.
Market Misalignment: No Need for the Product
A striking 28% of startup failures occur because the product or service does not address a real market need. This is often the result of entrepreneurs focusing on building a solution without fully validating the problem they aim to solve. Founders may rely on anecdotal evidence rather than comprehensive market research, leading to products that are either unnecessary or misaligned with customer expectations.
Many startups create products that are ‘vitamins’ rather than ‘painkillers’—nice to have, but not essential. While initial feedback from potential customers might be positive, real market demand may be weak when the product is launched. Timing also plays a crucial role. Some startups introduce solutions too early, when the market is not yet ready, while others enter too late, facing intense competition.
Poor Business Models and Revenue Generation Issues
Another critical factor is the failure to establish a sustainable business model. According to KPMG’s Startup Survey, only 37% of startups generate any revenue, and of those, a significant percentage earns less than €50,000 annually. Many startups focus on rapid user acquisition without developing a clear path to monetization. While offering free services can attract users initially, long-term survival depends on creating a revenue stream.
A poorly defined pricing strategy can also be detrimental. Some startups set prices too high, deterring potential customers, while others set them too low, failing to cover operational costs. Without a clear understanding of customer willingness to pay, startups struggle to maintain profitability.
The Investor Conundrum
Investor relationships are crucial but can also become a source of failure. Around 16% of startup failures are attributed to investor-related issues. Founders may struggle to communicate their vision effectively, leading to a loss of investor confidence. Some startups fail to meet investor expectations, either by missing key performance milestones or by failing to show scalability. In some cases, there is a misalignment between investor expectations and the startup’s trajectory, leading to disputes over strategy and operational control.
Team Dynamics and Leadership Failures
Startups are only as strong as their teams. A dysfunctional founding team can cripple a business before it even gets off the ground. Around 14% of startups fail due to team-related issues, including conflicts between co-founders, lack of expertise, and poor leadership.
Many startup teams consist of like-minded individuals who share a vision but lack complementary skills. A successful startup requires a balance of technical, business, and operational expertise. When gaps exist in key areas such as marketing, sales, or financial management, the business struggles to scale.
Leadership issues also play a significant role. Some founders lack the necessary managerial skills to navigate a rapidly evolving business environment. Others are too rigid in their vision, refusing to pivot when necessary. The ability to adapt and respond to changing market conditions is a hallmark of successful startups, while an inability to do so often leads to failure.
Cost Miscalculations and Operational Inefficiencies
Cost-related issues are another common cause of startup failure. Many entrepreneurs underestimate the costs associated with scaling their business. This includes operational expenses such as hiring employees, renting office space, and investing in technology. Poor financial forecasting can lead to a situation where the startup burns through its capital too quickly, leaving it unable to sustain operations.
Inaccurate cost planning can also result in pricing models that do not cover expenses. Some startups fail because they set prices too low, leading to unsustainable margins. Others misallocate their budget, spending excessively on marketing while neglecting product development or customer support.
The Role of External Factors
While internal factors such as financial mismanagement, market misalignment, and team issues are major contributors to startup failure, external factors also play a significant role. Regulatory challenges, economic downturns, and changes in industry trends can create obstacles that are difficult to overcome.
For example, startups in highly regulated industries such as fintech or healthcare must navigate complex compliance requirements. Failure to do so can result in legal challenges that hinder growth. Similarly, macroeconomic factors such as recessions or shifts in consumer behavior can impact a startup’s viability.
Failure as a Learning Opportunity
While failure is often viewed negatively, it can also be a valuable learning experience. In regions like Silicon Valley, failure is considered a natural part of the entrepreneurial journey. Many successful entrepreneurs have failed multiple times before achieving success.
Startup failure provides insights that can lead to better decision-making in future ventures. Entrepreneurs who analyze their mistakes, adapt their strategies, and refine their approach are more likely to succeed in subsequent endeavors. This mindset shift is crucial in fostering a culture of resilience and continuous learning.
Conclusion
Startup failure is a multifaceted issue with no single cause. It results from a combination of financial challenges, market misalignment, poor business models, team dynamics, and external factors. Understanding these reasons can help entrepreneurs make informed decisions, mitigate risks, and improve their chances of success.
Rather than fearing failure, entrepreneurs should view it as an opportunity to learn and grow. By conducting thorough market research, managing finances effectively, building strong teams, and remaining adaptable, startups can navigate the challenges of the business landscape and increase their odds of long-term success.
References
Cantamessa, M., Gatteschi, V., Perboli, G., & Rosano, M. (2018). Startups’ roads to failure. Sustainability, 10(7), 2346. https://doi.org/10.3390/su10 Bednár, R., & Tarišková, N. (2017). Indicators of startup failure. International Scientific Journal “Industry 4.0”, 2(5), 238-240.
Dr. Jan Erik Meidell
Professor Dr. Jan Erik Meidell is professor at Business School Lausanne (BSL) and lecturer at HEG Geneva, the Applied University of Sciences in Seoul and at IMD with courses in finance, statistics, data analysis and AI. Next to his academic duties, Prof. Dr. Meidell is director at the software company Lexigo.
