Startups, or businesses in their early stages, are inherently risky. Wondering why startups fail? You’re not alone, and there are multiple reasons. Many startups fail due to issues like bad market fit, funding problems, or poor business models. Other issues might include team conflicts, tough competition, and regulatory hurdles. However, we can learn from these failures. Whether a business has bounced back or shut their doors for good, there are many takeaways to help you avoid mistakes and use smart strategies in your own business.
Driven by bold ideas and entrepreneurial passion, many people see startups as engines of innovation. Yet, behind that excitement is the harsh truth that many startups don’t last. From tech startups to innovative personal products, the path from launch to lasting success is full of obstacles many cannot overcome—leading to some epic failures and many quiet defeats.
In fact, why startups fail is a really interesting question. The answer isn’t simple, and in fact, research indicates that there isn’t typically a single reason behind startup failure. We’ll look at data from the U.S. Bureau of Labor Statistics, dig into causes identified by researchers and find the lessons offered by failed ventures. Because even though failure is common, it is also a powerful tool for future success.
What Percent of Startups Fail?
U.S. Bureau of Labor Statistics (USBLS) estimates that over 20% of small businesses fail within the first two years. By the five-year mark, about 45% of small businesses fail.
Studies suggest that, eventually, approximately 90% of startups fail. This can be largely because of team conflicts, funding problems or bad business models. However, there are other factors—and often multiple issues—at play as well.
A few sobering statistics on startups include:
- Over 20% of new businesses fail within the first two years.
- 65% of startups fail within the first 10 years.
- 85% of AI startups fail within three years.
Unfortunately, businesses fail every day. There are some problems in determining with complete accuracy how many startups fail, however. First, not everyone agrees on how to define a startup. In addition, the USBLS only records that a business closed, even if it sold to or merged with another company.
What Is a Startup? Understanding the Definition & Goals
Many startups qualify as a small business according to the USBLS definition, but their structure and purpose are often different from those of a traditional small business. Essentially, startups are on the search for greatness and seek outside funding and resources to help make it happen. Many startups are disrupters. The founders have an innovative idea that they think will take over the market. Startups may not make any money for a few years. They rely on venture capital or other funds they’ve raised.
In contrast, a small business owner’s goal is to make money from day one, eventually enough to make a living.
A definition that hits closer to home than the U.S. Bureau of Labor Statistics appears in a recent report on startup failures, with a focus on the core competency deficit model. Here, researchers take the general consensus of considering a startup as “a team in which team members have a financial interest, the team possesses decision-making authority and agency, and the team is a social entity with distinct boundaries.” They then further refine the definition with “the initial stage of an entrepreneurial venture that is still in search of a repeatable and scalable business model with limited financial resources.”
This broader view of startups can be helpful to be aware of when considering the data. Although the USBLS research does not include sales or mergers, it can still provide valuable insights into general startup failure rates. Next, let’s get into the question “Why do most startups fail?”
The 10 Most Common Reasons Why Startups Fail
Yet, knowing the risks of failure for a startup isn’t enough, because it is incomplete. Figuring out why startups fail often yields more valuable information than knowing statistically how many startups fail. To help explore this, we’ll dive deeper: CB Insights examined 111 failed startups to identify the causes and uncovered some interesting results among those they polled. These core causes are also generally supported by other experts or studies.
1. Too Little Cash or Failure to Raise New Capital—38%
Whether the problem originated in bad budgeting, low sales, or a failure to secure new funding for a pivot or expansion, the end result is the same: another business gone. Businesses commonly fail to accurately estimate their business expenses or recognize hidden costs. They may also be too optimistic when it comes to anticipated revenue, scale too quickly, fail to manage cash flow, or have a weak funding strategy overall. Any of these issues can contribute to collapse.
2. Lack of Market Need—35%
Market research isn’t optional and a product that doesn’t fit the current market needs won’t resonate with the intended buyer. Equally troubling is a new product that isn’t different enough from existing offerings to stand out in a crowded marketplace. According to the US Chamber of Commerce, a lack of sufficient need for the product or service is another common reason why startups fail.
3. Product or Service Outcompeted—20%
Even with a great product-market fit and plenty of funding, if the competition does a better job getting customers, it may not matter.
4. Business Model That Doesn’t Work—19%
Crafting a solid blueprint, with a business plan that includes all the details, options, and even the “what-ifs” that the startup may face can prevent a lot of problems. Ultimately, a flawed business model can impact cash flow and scalability, leading to failure.
5. Regulatory or Legal Issues—18%
This mainly applies to industries where copyrights are an issue, like the music industry. But if they can’t be resolved and the startup relies on them, it could spell disaster. This is additionally true for fintech startups. PR Newswire reports that 73% of those startups fail due to regulatory issues.
6. Problems With Pricing—15%
Imagine your product is terrific, but you struggle with cost control and related pricing. This can easily spiral out of control, burning bridges and destroying credibility—not to mention causing cash-flow problems.
7. Wrong Team Fit—14%
Even if the team members all work well together, if they are lacking crucial skills or knowledge, the business is more likely to crash and burn.
8. Bad Product Timing—10%
Great product, great team, amazing financing…but the timing was off. Whether too early or too late, timing is everything. Forbes mentions that people might not need the product—yet. While sometimes major unforeseen circumstances, like a pandemic or economic downturn, can also remove the need for what seemed like a great product or service, your best bet is to do thorough market research in advance.
9. Poor Quality Product—8%
Ever heard that you should under-promise and over-deliver? About 8% of startups fail when they get this wrong, whether their product was poorly designed or because the startup didn’t listen to what customers wanted. Fortunately, this is an aspect of why startups fail that you can control with high-quality products and good quality control.
10. Lack of Harmony Among the Team or Investors—7%
Maybe it started out okay, but problems start when core team members or investors begin struggling to communicate or cannot agree on a key strategy. Tom Eisenmann, Harvard Professor and author of Why Startups Fail: A New Roadmap for Entrepreneurial Success, discusses the intricacies in relationships when it comes to startups. When it impacts startups, he refers to it as “Good Idea, Bad Bedfellows.” Eisenmann suggests that when multiple parties involved in a startup make mistakes, it can lead to collapse. These can include a lack of industry experience and connections, slow decision-making, weak strategy, lack of funding, and more.
It’s important to note that the top reasons that startup failures from CB Insights’ research sometimes switch places in other papers, depending on which startups they polled. For example, a 2024 study of failed startups and competency deficiencies placed a lack of customer service orientation and information-seeking at the top. Regardless, there is no one factor responsible for a startup’s failure and the information should make aspiring founders do a little (or a lot) more research.
In addition to the top ten, other contributing reasons why startup businesses fail include team burnout, unsustainable growth, and flimsy marketing.
Powerful Lessons From Failed Startups
While it’s true that we often learn more from failure than from success, no startup founder wants their idea to crash. One tech startup discovered that, even with money coming from multiple sources and terrific partnerships in place, timing is everything. Another founder took the lessons learned and tried again with another business. Here are some real-life examples of why startups fail to learn from.
General Magic and the Impossible Product-Market Fit
The 1990s were an exciting time in personal computing development. Computers were finally small enough to actually be personal, and digital phone development was on the rise. General Magic was a Silicon Valley-based company that produced Magic Cap, an operating system used in the Motorola Envoy and Sony’s Magic Link PDA, which all launched in 1994.
The company decided to make everything itself—components and software. Originally launched as an Apple side-project, General Magic had significant financial support and outstanding partnerships. Sony’s Magic Link was the final product, but sales were dismal. Incidentally, Apple’s Newton came out a year before the Magic Link and had the same awful sales.
There was nothing wrong with the product. It was ahead of its time…too far ahead. The people weren’t ready yet. For more on this magical failure, there’s a documentary: General Magic is a must-see for anyone who needs to learn that failure is never the end of the story—it’s only the beginning.
How SocialNet Was the Foundation for LinkedIn
Reid Hoffman is no stranger to failure. Yet, he’s also proof that the seeds of future success are often sown in the failures of the past. SocialNet launched in 1997 but lacked focus—trying to connect people for dates and professional networking. Yet, timing and hiring were also problems for SocialNet and it failed within two years.
But Hoffman learned the value of focus, customer acquisition, and clear audience targeting. Taking those lessons, he co-founded LinkedIn—the leading online professional network.
How to Reduce the Risk of Startup Failure
Startup companies tend to be higher-risk operations than purchasing an existing successful business or a franchise. However, there are ways to reduce the risk of startup failure, like running a lean operation to reduce overhead and testing a minimum viable product (MVP). A few key practices will help overcome obstacles on the way to success.
Market Research and Customer Discovery
Market research is a core component of reducing risk. Who will buy your product? Is there a need? Unfortunately, some founders get wrapped up in the “cool” factor of their idea and forget to ask those questions.
Market research and customer discovery can be time-consuming, but done correctly, they save money in the long run. These crucial components of knowing how and where to market the product—and can tell you whether there is even a market for it.
Don’t Let Perfectionism Delay Your Launch
Taking calculated risks is at the very core of being an entrepreneur. Yet, when perfectionism strikes, it can make founders hesitate to do anything. It leads to late or non-existent launches, missed market opportunities, and wastes money that you don’t have to waste.
Test your product, figure out what the minimum viable product is, and launch that. There is a reason products have V1, V2 and more—and it isn’t because V1 was perfect. It’s because they got the product to a place where it was functional and useful, then used customer feedback to edit, adjust, and ship the upgraded product.
Track the Right Data
Benjamin Yoskovitz, co-author of Lean Analytics, says that it’s critical to track the right data at the right time. He also says to base what you track not only on the type of business, but also, the stage you’re in.
Understanding which analytics to track is crucial to your success. Tracking the wrong data can cause you to miss opportunities or challenges, making it difficult for you to adjust quickly enough. Many reasons why startups fail because they don’t know what steps to take next. However, gathering and analyzing the data yourself gives you greater insight into what works, what doesn’t, and how you can improve.
Don’t Ignore Red Flags
Many entrepreneurs make the mistake of going forward with a partnership because of the potential and ignore behaviors and attitudes that would otherwise be unacceptable.
In fact, in an exclusive episode of Unscripted, entrepreneur and best-selling author Natalie Dawson says, “When there is something that they do in their professional life, but also in their personal life that you just kind of want to put it in a box and you want to put it outside the scope of your partnership, that is a red flag.” She explains that the earlier you address those issues, the better the partnership can become.
When you ignore red flags, they can easily suck the life out of a great opportunity, creating more obstacles than are necessary.
Find Partners and Team Members With Skills You Lack
Starting a business with your best friend sounds great, but if you both bring the same skills to the table, you need to bring in more talent. That means figuring out which skills your current team is lacking. Then, attract the right people to balance it out.
Turning Setbacks Into Strategy
Shuttering your business is never easy, but a failed business isn’t the end. Many founders who floundered in earlier efforts eventually found success—sometimes hitting it so big that it seems impossible. But failure in entrepreneurship isn’t a sign of incompetence. Rather, it shows that you tried something risky—and that’s the nature of innovation.
By studying the reasons startups failed, whether through a poor market fit or funding issues, you have a better chance of avoiding making the same mistakes. The most successful entrepreneurs don’t avoid failure. Instead, they learn from it, make adjustments, and try again—hopefully smarter and stronger.
It’s a fact of life that sometimes businesses fail. You can’t always avoid failure and the risk inherent in starting a business. However, planning and research combined with a growth mindset and confidence can help you through the challenges.
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