Creating a startup is no easy feat, and not for the faint of heart.
So you’ve got to have a great idea, a really great idea.
That doesn’t even get you started.
You’ve got to understand the market and the pain points you’re resolving. Then there is the go-to-market strategy and product message fit that has to be spot on. You have to be resourceful and unassuming, ready to pivot, and prepared to fight for your stake in the space.
There is also the product itself and the company. You’ll have to build the MVP, find the customers, secure funding, form a team, scale and grow, and generate revenue.
And, even if you accomplish all of this the odds are still against you—the startup failure rate is about 90%.
In 2023 alone, over 3,200 private venture-backed companies failed.
Of course the funding landscape has dramatically changed. An 84% drop in VC fund distributions between 2021 and 2023 has made the competition for those funds fierce.
But don’t give up hope. From my experience I have found that the lack of funding is not the root cause of failure. It is the symptom of an underlying ailment.
Identifying (and correcting) those ailments, is the key to avoiding the ranks of failed startups.
Of course mistakes happen. Like William Rosenberg (the founder of Dunkin’ Donuts) said:
“Show me a person who never made a mistake, and I will show you a person who never did anything.”
Regardless of how many startups fail, as entrepreneurs we keep going and we keep trying.
As the founder of DevSquad, I’ve helped develop over 100 SaaS products. And as the founder of DevStats, I’m scaling my own SaaS business too.
I have seen my share of startup failures (and successes). So to help you learn from others and improve the percentages of startups that succeed, I have compiled a list of the top reasons why startups fail.
The 7 top reasons startups fail
Why do businesses fail? Why are some startups successful while others stumble and fall? Learning from failure provides sobering insights that just might help you succeed. Here are some of the common reasons I believe are worth noting.
1. Poor product market fit
I believe the reason why most startups fail is because they can not find product market fit, especially when they are trying to do something "revolutionary" and "new".
Poor market fit occurs when a product doesn’t align with the needs or pain points of the target market. For example, Dayslice was a scheduling tool for freelancers that wasn’t able to establish a strong unique value proposition in a saturated market. The founder, Ishita Arora, discussed the reasons for shutting down Dayslice on X. There she highlighted the key problem saying:
“As we rolled out the product, we also often found ourselves in a catch-22. Either users were “starters” who had no existing solution so adoption was easy but their pain was not as painful as someone with a full-fledged business.
Or users had an expansive customer base, weren’t too happy with existing solutions, but felt it’d be a headache to switch.”
In my experience, having many direct competitors reduces risks. But the pain point you are addressing has to be significant enough to inspire change.
2. Weak go-to-market strategy
A weak go-to market (GTM) strategy is another fundamental reason startups fail. With AI and all the available frameworks, product development has become a lot easier. Nowadays, GTM is a lot harder than building a product.
GTM strategy is the process of introducing a product to the market. If a product is poorly introduced then it never has a chance to succeed—even if it is well defined. Timing, target audience, and pricing are all factors that must be aligned for a successful GTM.
A famous example of a weak GTM was Google Glass. Although the product had significant buzz, it was launched as an exclusive, high-end device with limited use cases. This led to a confusion among consumers about its value. There were also the privacy concerns around the device's video recording which created social pushback and even product bans in some public spaces.
3. Poor message-market fit
Product message fit is also a big deal. Product message-market fit is when you can explain the value and uniqueness of your brand to your target audience in a way that resonates. This is achieved when you are able to join the conversation your customer’s already having in their head.
At DevSquad, we had the experience of a poor message-market fit once. It was not fun. What happened was we changed the messaging in an attempt to go up market and land more enterprise. Our efforts almost put us out of business. But we were able to catch the mistake and pivot before that happened. We reverted back to the old successful messaging and continue to help businesses and founders launch innovative products.
4. Unrealistic projections
Unrealistic projections are all too common—especially when there is a lot of passion tied to the product. I just had a call with one client who had this idea that everyone would want his product; he spent a lot of money on marketing and only made 2k in MMR. Now, he is pivoting.
Overly optimistic revenue, growth, or user acquisition projections can lead to mismanagement of resources and expectations. When reality doesn’t meet projections, it can be difficult to recover.
Convoy was a good example of this. The digital freight company was co-founded by Dan Lewis who saw a multi-billion dollar market with less than 30 startups showing interest in the field. His confidence was clear.
“When you have systems that use data, algorithms and technology to make decisions faster, to automate the steps, to make it self-service for the users, then it can scale in a non-linear way. So that is what Convoy is doing, and that’s where the consolidation will happen. It’s a better model, and it will grow and take more share.” - Lewis told TechCrunch
Unfortunately, the complexities and timelines of disrupting the freight industry were too great and the company had to shut down.
5. Entering a battle you can’t win
Competing directly with well-established players in a saturated market is typically a losing strategy. You must offer significant differentiation and have the resources to compete effectively to stand any chance of success.
For instance, I never saw a b2c product be successful; they require a lot of money, and the chances are very low. Everyone wants to be the next Uber or Netflix—but that puts the odds against you big time.
Fintec is another field where these unwinnable battles are often seen. Consider Braid for instance—the banking startup for multi-user accounts. They were dependent on the sponsoring bank’s relationship with the regulators. This meant the bank’s risks became their risks.
“What we didn’t understand at any level of depth, is that even the most robust compliance program would only get us so far. We were taking on indirect risk from every fintech in the bank’s portfolio, as well as the bank’s relationship with its regulators, which is highly protected and confidential.” said Amanda Peyton, former CEO of Braid.
6. Being hacked
Cybersecurity breaches can be catastrophic for startups. They often lead to a loss of customer trust, legal liabilities, and financial penalties. What’s even more concerning is that small- and medium-size businesses amount to roughly 85% of attacks. And if you are hacked, there is a 60% chance going out of business within six months.
CloudNordic is a recent example of a catastrophic attack. The cloud storage provider was hit by a ransomware attack in 2023 that led to the loss of all customer data. The company was unable to recover from the breach, which forced them to cease operations.
7. Failure to Adapt to Market Changes
Startups need to be agile and responsive to shifts in the market to stay relevant. Failing to adapt can lead to obsolescence and eventually shutdown.
Zeus Living was a causality of market changes. The startup was offering flexible, furnished housing rentals which exploded during the pandemic. They were able to raise substantial funding, but their investing focus in 2021 was to “get more homes.” Turn the clock forward to spiked interest rates and a post-pandemic market and the company could not adapt. This placed the company in a financial bind that they were unable to get out of.
Avoid the common pitfalls of failure
One of the great ways of improving the success rate of startups is through expert advice and working with people who have navigated the rough waters before.
With DevSquad you get the strategic advice and product strategy that comes from our developing over 100 SaaS products. We help with technical decisions, development feasibility, architecture, cost, and product-market fit, and aligning to user needs. You also get a technical advisor with your development team to keep the team on track. We only take on new products that we can provide strategy for and we only select products with a strong potential for success. This is because we can only onboard a couple of new customers a month.
Are you building a SaaS startup? Get the expert advice and product strategy to improve your chances of success alongside fully-managed product development. Learn more about our SaaS development agency.
