Did you know that of new ventures that don’t attract outside investors, nearly 90% will fail in the first 3 years? Regardless of its source, the amount of capital invested must last at least until break-even, otherwise another timely capital raise will be required for the venture to avoid financial failure. And even for those startups that do attract outside capital, roughly 35% will fail nevertheless.
In fact, most startups fail, and typically for one of a handful of underlying reasons, which include:
No market need
Most often, startups fail because they’ve developed a product that doesn’t resolve a substantial (and previously unmet) market need, and thus there is not enough demand to sustain the product and/or business.
It’s simply crucial that your startup intimately know the unmet needs of its target customers, and shape its innovation to meet them, such that your innovation is the single best way to resolve those unmet needs, as proven by strong sales. Usually, this will be a highly iterative process, requiring lots of unexpected pivots as your team continues to better understand the unmet needs (as evidenced by valid market research data) and hones its innovative product to meet them.
Not the right team
Whether conflict between co-founders, inexperienced management, or board members that aren’t on the same page, not having the right team in place can thwart even startups with receptive markets. Don’t overlook the importance of building and sustaining the best team you can.
Got outcompeted
If there’s a serious demand for your innovative product and the potential for meaningful profits, you can bet your startup will attract competition sooner or later. Failing to protect the intellectual property that makes a startup’s product innovative amounts to a passive surrender of the innovation and its customers to competitors.
Those are three of the most common reasons that startups flame out. But although any of these might be the underlying cause, by definition the moment new companies fail is when they run out of money.
The vast majority of startups are underfunded or mismanaged, usually burning through initial funding far quicker than originally expected, often on unnecessary activities.
Understandably, such startups tend to be eager to secure additional funds, typically from outside sources (e.g., friends and family, angel investors, venture capitalists, licensees, etc.) to give them the needed push through to break-even and beyond.
That being said, think twice before accepting outside investments, particularly if there’s a reasonable chance that you can grow your company organically, i.e., bootstrapping using earned profits. Once you accept investments by others, your company will become beholden to them and their expectations of jumbo returns in a relatively short period of time. With surprising frequency, that sort of emotional, moral, or sometimes even legal obligation can distort your startup’s business judgment, leading to shortsighted decisions that hurt your company in the long run. In short, don’t take the money if it won’t grow profits sufficiently to provide the expected return to your investors at the speed they anticipate, while setting your company on the path to even longer-term success.