Where, When, Why, and How Startups Fail

“If you want your startup to succeed, you need to understand why startups fail.”
— Tom Eisenmann, Professor of Startup Administration at Harvard Startup School

This analysis is based on peer-reviewed studies, articles, case studies, government records, academic studies, and 1,200 one-to-one interviews. One of the most critical insights from this research was that founders often fail radically differently than what you read about in published papers. The reasons published in trade journals and news articles that founders believe killed their startups are not necessarily the culprits. This is partly due to how data is collected through prepared questionnaires and top-of-mind recollections from founders, which includes their personal biases.

Looking to build and scale a successful startup? “The Startup Lifecycle: The Definitive Guide to Building a Startup from Idea to Exit” by Gregory Shepard is your essential roadmap. Whether you’re just starting out or scaling up, this comprehensive guide breaks down the entire startup journey from ideation to exit, backed by real-world examples and actionable strategies.

Check on Amazon

Reason 1—Building the Wrong Management Team

Building a startup is a people game. No matter how good your concept, core technology, or product, your startup will fail unless it has the right team in place. When CB Insights conducted postmortems on over three hundred failed startups, they found seven of the top twenty reasons for startup failures related to people issues and startup culture. Businesses found that 23 percent of failed startups attributed their losses to problems with their team. In other words, 35 percent of failures were largely due to the people involved in the startup.

There are many other triggers for failure—up to and including simply running out of cash—which can be traced back to underlying problems with the people making the decisions. This includes the decision to hire more people than necessary or simply overpay new employees. According to SmartAsset, startups pay an average of over $300,000 in payroll for their first employees. Unfortunately, paying top dollar is no guarantee that your early employees will be able to deliver the results you need.

Every startup founder understands the importance of building a good team. The people you hire early on will shape your culture and your capabilities in critical areas, such as Sales and Marketing, Product and Engineering, Service and Support, and Shared Services, like HR and Finance. But failure is often baked in, even before you start making your first hires, with the makeup of the founding team itself.

Thousands of horror stories highlight the need for founders to take a long look in the mirror when starting. It’s essential not only to be humble but to recognize the things you do well—and even more important, to acknowledge the things you don’t do well. As is often stated, it’s important to know what you don’t know. Perhaps you’re a great pitchman for your product but don’t have a head for finance, or maybe you’re a tech specialist who freezes up like Mark Zuckerberg when the cameras are turned on. Either way, finding the right cofounders and hiring the right startup team can help fill in the gaps in your skill set—as long as you make corrections, delegate, and defer when necessary, and have the strength and humility to recognize your own shortcomings.

The Importance of Team Alignment

Startups are powered by passion, and building a startup requires an immense amount of self-belief without any self-centeredness. There is no place for the traditional “ego” in startups. Remember, to stay focused, you must be humble! If you aren’t all on the same page from the get-go, you’re doomed. Alignment is key.

Everyone on your team, including you, your leaders, investors, internal staff, and the whole outside team, must see your startup’s North Star as clearly as you would on a beautiful summer night. The North Star is your compass. It will ensure you and your team are directionally guided to your end goal. Without an alignment of purpose, goals, and direction, it is easy for founders and their teams to lose interest, become disconnected, and get pulled in different directions.

Reason 2—Targeting the Wrong Customers

According to CB Insights’ postmortems, nine of the top twenty reasons for startup failures—and five out of the top ten—are related to failure to engage customers effectively. One of the first questions that startups need to answer is: Who will buy their products?

The key is to recognize up front the value you will offer customers, without which you have no business. If you aren’t creating value for customers, it doesn’t matter what your logo looks like or what your startup offers employees in a benefits package.

Understand your customer like you understand your family, best friends, and children. That is to say, you have to understand, as much as possible, who they are, where they go, what they like to have/buy, what matters to them, and how they think.

Remember, the “right” customer isn’t just one who’ll happily buy your product. The goal isn’t to sell a widget today—it’s to build a startup that you can sell tomorrow. That means building a regular/steady customer base that can serve as stepping stones to more customers and market sectors.

Reason 3—Overlooking the Exit Strategy from the Start

Incredibly, 95 percent of founders start with little or no idea of their exit strategy. When considering who you will sell your startup to, reflect on these three questions:

1. Do I know how many startups my potential acquirer(s) have previously acquired?
2. What were the terms of those transactions?
3. Do their customers match my customers?

Remember, there may be one hundred startups for five well-researched potential target acquirers, so it’s like musical chairs, where someone will constantly be left standing. The bottom line is that acquirers buy startups to save or make money. Therefore, the startup you are trying to exit must either save or make the acquirer money, and you can’t make money without a solid product.

Reason 4—Overvaluing Your Startup

Overvaluation has been an ongoing concern of investors and potential acquirers for many years. False inflation often happens when startup founders without a capital strategy look only at their closest comparable valuation. If you know that startups like yours sell for $50M, you need to consider not valuing yourself past that figure, and if you do, you had better have a really good reason.

Beware of Promising Unicorn Status

Based on research, less than 0.0010 percent of startups achieve unicorn status, so if your plans are to have any real value, then you need more realistic goals. Aiming too high and getting your valuation wrong puts you on the wrong trajectory from the get-go and guarantees that, eventually, you’ll run out of runway.

To avoid these problems, many of the smartest startup founders stay nimble and lean early, making every dollar count while growing their startups. Instagram, for instance, took just $500K in seed money while building its product and demonstrating its staying power, and Tumblr took $750K in series A funding. Both startups ultimately achieved $1B+ exits because of (not in spite of) their restrained approach early on.

Reason 5—Listening to Bad Advice

In the beginning of a startup journey, it’s best to pay close attention to all the good advice you receive and to completely ignore all the bad advice you receive. Of course, the trick lies in figuring out which is which. In the beginning, everyone has an opinion. But not everyone has an opinion that’s worth listening to.

Who Can You Listen To?

You should chiefly seek advice from founders who’ve proven their chops by steering at least two, preferably three or more, startups to successful exits. There are two main places to get insights:

1. People who’ve tried and failed to build a startup—because knowing what not to do is always important
2. Domain-specific experts in areas like legal, technical, or specific business functions

Remember the words of NBA legend Michael Jordan:

“I’ve missed more than nine thousand shots in my career. I’ve lost over three hundred games. Twenty-six times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”