How Many Startups Fail and Why?

Key Takeaways

• The Small Business Administration (SBA) defines a “small” business as one with 500 employees or less.
• In 2019, the failure rate of startups was around 90%. The research concludes 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year.
• According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry.
• Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.

How Many New Businesses Fail?

The Small Business Administration (SBA) defines a small business as an operation with fewer than 200 employees. That means many businesses out there are technically “small” even though they seem very large. As per the definition, these small businesses make up 47.1% (latest information as of 2017) of the working population in the U.S., so their growth and success are vital to the U.S. economy.

There are currently 31.7 million small businesses in the United States, which make up 99.9% of all U.S. businesses. Many small businesses start up every month, but the failure rate is high. As of 2019, startup failure rates are around 90%. In addition, 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year.

Reasons for Failing

If you poll former business owners, you will get a wide variety of reasons as to why their businesses failed. 

Lack of Money: This widely given reason doesn’t really explain why a business failed. The money ran out because it stopped coming in, so why did the cash flow dry up? Was it due to poorly managed costs or because sales weren’t high enough? Money running out also relates to an inability to obtain financing or further financing needed to sustain a business, especially in the early days, until a business can start generating profits.

Wrong Market: Too many people try to start a business targeting everyone as their demographic. This doesn’t work out well. Next, they try to target everyone in their town. Again, too broad. The more narrowly defined your niche is, the easier it will be to market to the target audience. 

Lack of Research: You have to know what your customers want. Too many would-be entrepreneurs go into the market thinking they have a great service or product to offer, but they fail to realize that nobody wants that service or product. By doing your homework and researching your market, you will know precisely how to meet your potential customers’ needs.

After understanding why a startup fails, we will categorize and tell why the problem starts, and by crafting strategies, you can solve the issue of your startup– and you can make a comeback.

1. Problem

2. Strategy 

3. Solution

Every year millions of startups are born, and only a few mark an impact. Have you ever thought about why it is so? And do you know that in 2020-2021, more than 16,000 startups will be recognized globally? We see every entrepreneur wants to grow and wants to get recognition globally. But things can only go positively when you set the vision and work on your strategies with your team.

“Failure is simply the opportunity to begin again, this time more intelligently.”

–Henry Ford, Founder of Ford Motor Company

Let’s start with the problem you face after launching your startup.

Few things generally hamper immediately after the startup launch are:

• Vision change or shift
• Lacking team effort
• Shortage of money
• Strategy failure
• Taking advice from the wrong people
• Investing too much money too soon

Before stepping into the business, an entrepreneur generally thinks of investing money and choosing a bunch of people who will take them to success, which is wrong. And apart from this, business owners take a hefty loan from the bank, and if the venture fails, they suffer a massive loss. So again, we want to connect the dots that we mentioned earlier; we said above, most entrepreneurs think money is everything. Still, they forget that investing money does not mean the startup will run successfully. 

1. Problem

We observed that after the first failure, entrepreneurs change their vision. So don’t change your mind after the first failure; try to think and check where it went wrong.

Remember, there is no guarantee of business success, but you can minimize the problem by adequately implementing strategies and setting your target customers.

We know many entrepreneurs facing problems in their startups think to change their minds and wrap their business, but we would like to give an example of Cupertino giant Apple.

When Apple launched their Macintosh (24th January 1984), they faced a huge loss, and the product failed miserably. So we want to ask those entrepreneurs, has Apple left the business or fought back by launching some innovative products and marketing them carefully?

The answer is they fought back and became the first One Trillion company.

So the moral of the story is, accept the failure, take customer feedback, work again, and launch a better version of the product.

After reading this, some entrepreneurs might think, what if we continuously fail even after implementing the best strategies and don’t have the potential to suffer loss more than this limit. The simple answer is you might have misjudged the market and customers, so set your market and the customers you want to target. Then, instead of offering or launching a product, provide a problem-solving product that eases their life.

A customer will only buy or avail of your services if they think it will benefit them and make their lives easy. For example- Why is the washing machine market an evergreen market for most companies? The answer is, it eases your life by washing your clothes.

2. Strategy

Invest your money in your strategy, not on startup facilities; as a beginner, you should take a calculative risk because you never know what will happen next. The biggest and common problem of every entrepreneur is a lack of funds. It’s a bitter truth that the majority of the startups shut because they lack funds. And if you don’t have innovative products or don’t have a foolproof plan, no investors will interest in funding your startup.

We advise you to invest in the strategies; in short, invest money in your plans that helps to implement in your company. The next thing that comes is, what are the advantages of investing in a plan or strategy?

• It minimizes the wastage of cash.
• Enhance focus on strategies.
• It boosts your calculative risk-taking ability.
• It promotes smooth workflow.

A good strategy is effective, and that can only be made after analyzing the market, conducting a few surveys of the customers, and asking them what their problems are. Then, after analyzing their problems, brainstorm with your team and develop a foolproof strategy for your startup.

Always remember if you want to grow, first satisfy your customers’ needs because in the market, if you create an environment of positive mouth publicity, then sooner you will fly high without spending on advertisement.

3. Solution

Set Goals: Know exactly where you need to be and where you want to be. Without a goal, you’re just an itinerant aimlessly.

Research: Know everything about your market. Know what customers want. Know that they will pay $9 but not $10. Know their incomes, their desires, and what makes them tick. The more you know, the more you can pitch to them.

Love Your Work: If you don’t love what you do, it will show. You must be passionate about your business, or it will just be a job.

Don’t Quit: No matter how great of a business you have, you will have downtimes. There will be periods when things are dragging along, and you question your decision to embark on this path. This is a time to put in extra hours, press harder, and make it work. 

The Bottom Line

Approximately 70-80% of the startup fails during the initial years. That’s a high number indicating that many things need to go right for a business to succeed. Fortunately, you can be one of the 20% that succeed in the first year. To do this, you need to follow the crucial information outlined above, and, most importantly, you have to test your idea, do your homework, and make sure it will work before you jump in with both feet.

Overall, as a reader, you get to know why startups fail and the numbers of startup failures with the above information. See, the risk is everywhere; without risk, you can not operate a business, but we had outlined those points that will give you a warning reminder if anything goes wrong in your startup, and you will be more alert.

Also Read: Buzzing Startup Terminologies that Every Entrepreneur Must Know

Karan Jain

Born in the family of entrepreneurs and have inherited the same. Started building applications in order to pay for my tuition. Later founded a tech company, marketing agency, and media outlets.