Failure is one of the biggest risks that every entrepreneur fears of experiencing. People launch their startups with great and sometimes unrealistic expectations. However, it results in disappointments and failure.
Your product fails to earn the expected revenue. Your marketing campaign maybe seemed good enough to increase your reach. However, it might not make any impact on your sales. Or, your competitors might come up with a marketing plan or a pricing strategy. That can beat all businesses in the particular industry.
This leads us to a question, what is the startup failure rate? And how many startups are likely to close their businesses within the first few years of operation?
How Often Do Startups Fail?
You may have got the inspiration to turn your business idea into reality. You did hear all those success stories. It is where a company that started with nothing transformed into a million-dollar company. That too in a few years. According to the startup failure rate statistics, a whopping 90% of startups fail. Sadly, 10% of startups do not even last two years.
People start a new venture. They think that their product can become as popular as Airbnb, Stripe, and Slack. The reality is only 1% of startups achieve this kind of success. The rest of them either shut down or embrace a new business idea. We aren’t mentioning these statistics to discourage you from launching your business. However, knowing the numbers will help you set realistic expectations. Based on these statistics, you can set up a business that doesn’t just survive the competitive landscape. However, it can grow into a famous and established organization.
You might wonder what causes these failures. Just having a rough idea of how you’d launch your product is not enough. Marketing it to your audience just won't do. It won’t guarantee success for your venture. Running a business requires passion, dedication, and patience.
Why do startups fail?
There’s no one particular reason that causes startup failure. However, there is a combination of factors that slow down your business growth. The startup failure rate report by Failory shows that 34% of startups fail. It is because of the inability to satisfy the customers’ needs. Also introducing a product that can help solve your audience’s pain points. 22% of them fail because of marketing problems. While 16% have to shut their operations down because of financial issues.
The stats show that 9 out of 10 startups fail. This includes businesses across different industries. It is from the healthcare sector to banking. Following a startup survival guide can help you. You can learn the basics of thriving your business. This will help in the competitive market. But before that, you need to know the causes of this failure.
Common Causes of Startup Failure
The success rate of a new business is between 10% and 20%. However, it can be higher depending on your business plan, capital, and goals. For instance, in 2021, there were 600 unicorns that did exceptionally well.
Startup failures happen when a company halts its operations. It is either because of a lack of money to fund operational costs. It can also be due to conflicts with the partners.
There can be other reasons that might lead to a permanent closure of a business. We’ve mentioned the most common causes of startup failures below.
Financial Problems
Research shows that 82% of startups fail because of financial problems. Poor cash flow management affects your ability to meet day-to-day expenses. Sometimes, the investors back out because of the firm’s inability to generate the estimated profit. These companies blame their investors. It is for not investing enough money to keep the business alive.
However, there is a truth about keeping your organization on the right track. It requires much more than capital investment. Preparing a budget, limiting your spending, and projecting your revenue, are essential. Also, keeping enough money aside for unforeseen events, are a key factor. Also, tracking your expenses are a few tips. It will go a long way in maintaining cash flow in your organization.
Outcompeted
A competitor can innovate their product. They can launch something that surpasses customers’ expectations. There’s a possibility the competitors have already built a loyal client base. It leaves no chance for a startup. They can't grab the attention of these customers.
That’s why thorough market research is incredibly important. It is for entrepreneurs planning to start a new venture. Conducting a competitive analysis is crucial. It is for understanding the current competition. You need to know about your rivals’ strengths and weaknesses. You must also identify the areas where you can beat them. Remember that understanding your competitors is very important. It is as important as conducting market analysis.
Conflicts Between Founders
Nothing destroys a venture faster than a conflict between co-founders. Everyone has different opinions. So, conflicts are an inevitable part of a business. Around 65% of startups fail because of conflicts between the company’s co-founders. Lack of communication, differences, and poor management are a few factors. It can raise conflicts between partners. As a result, it eventually shuts down the company.
Are you launching your company in partnership? It’s important to scan the co-founder’s background. This is necessary before signing the agreement. Knowing your partners on a personal and professional level can also help. You can mitigate the risks of startup failures due to conflicts.
Issues in Product and Pricing
A high-quality product is non-negotiable. Every customer that buys from your store can turn into a loyal customer. How you nurture your leads play a significant role. This helps in building a loyal customer base for your brand. However, if there is a compromise in product quality, even a huge discount or cashback offer, won’t help. You will lose potential customers. Moreover, you will get tons of negative reviews.
Likewise, startups fail because of a poor pricing strategy. Price it too high and your customers won’t buy it. Price it too low and people will think your product is of low quality. Do you want to generate sales? You need to arrive at the best price. Market research, competitive analysis, and your audience's budget and buying patterns are a few things. These can help you set a price. Still, it takes several trials and errors. It is before you figure out the most suitable price.
Ineffective marketing is another cause of startup failure. Every business wants to be a unicorn, but most of them wind up within a year. Understanding the causes of failure and setting realistic expectations are some ways. They can help thrive your business.
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