How Many Startups Fail? A Deep Dive into Startup Failure Rates and Reasons
It‘s a sobering statistic that gets thrown around a lot in the startup world: 90% of startups fail. For every wildly successful unicorn like Uber, Airbnb, or Stripe, there are countless other startups that crash and burn, often before they even really get off the ground.
As an entrepreneur, it‘s important to have a realistic understanding of the odds stacked against you. While the startup failure rate can seem discouraging, analyzing the reasons behind it and learning from the mistakes of failed ventures can help you chart a path to success. In this post, we‘ll take a comprehensive look at startup failure rates, break them down by industry and funding stage, examine the top reasons startups fail, and extract lessons from some of the most high-profile startup failures in recent years.
Overall Startup Failure Rates
The frequently cited 90% failure rate for startups comes from a 2019 study by the Startup Genome project. Breaking it down further, their research found that:
- 11 out of 12 startups fail
- 3 out of 4 venture-backed startups fail
- 2 out of 3 "scale-ups" (startups that have raised Series A funding or later) fail
- 1 out of 2 "unicorns" (startups valued over $1 billion) are suspected to be overvalued and may still fail
Other studies and estimates peg the overall startup failure rate anywhere from 75% to 90%. While the exact percentage varies, the consensus is clear—the vast majority of startups will not succeed long-term. CB Insights found that less than half (48%) of startups make it to their 5th year, and only 1% become unicorns.
Top Reasons Startups Fail
Understanding the main reasons startups fail can help entrepreneurs avoid common pitfalls. CB Insights analyzed 111 startup failures to identify the top factors:
- Lack of market need (42%) – Building something no one wants is the quickest way to fail
- Running out of cash (29%) – Mismanaging finances and not having enough runway is deadly
- Not having the right team (23%) – A strong, diverse team with the right skills is critical
- Getting outcompeted (19%) – Many markets are highly saturated with well-funded competitors
- Pricing/cost issues (18%) – Startups must get pricing right to be viable
- Poor product (17%) – Execution is key; a flawed product won‘t fly with customers
- Need for business model (17%) – Many startups start without a clear path to monetization
- Poor marketing (14%) – Getting traction requires effectively reaching your target customers
- Ignoring customers (14%) – Startups must engage with customers and iterate based on feedback
- Product mistimed (13%) – Timing the market is tricky but launching too early or too late can doom you
Other significant factors include disharmony among team/investors, pivoting gone bad, lack of passion, failed geographical expansion, no financing/investor interest, legal challenges, poor failure to pivot, and burnout. Rarely does one single issue lead to startup failure; rather, it‘s often a combination of interconnected factors that compound upon each other.
Failure Rates by Industry
Startup failure rates can vary significantly by industry. Some of the industries with the highest startup failure rates include:
- Information (63%)
- Construction (53%)
- Manufacturing (51%)
- Retail (53%)
- Transportation (55%)
On the other end of the spectrum, the industries with the lowest failure rates tend to be:
- Finance, insurance & real estate (42%)
- Education & health (44%)
- Agriculture (44%)
- Services (45%)
Even within broader industry categories, failure rates can differ for specific sub-sectors. For example, in the Information industry, a Startup Genome analysis classified Blockchain and Artificial Intelligence startups as "growing" based on increasing early-stage funding deals, while AdTech and Digital Media startups were classified as "declining."
Each industry faces a unique set of challenges and circumstances that can impact a startup‘s chances of success or failure. Retail startups have to contend with cash flow issues, thin margins, and heavy competition from incumbent giants like Amazon and Walmart. Fintech startups often face thorny regulatory hurdles. understanding the specific dynamics at play in your chosen industry is vital.
Failure Rates by Funding Stage
Startup failure rates also vary based on how much venture funding a startup has raised:
- Startups that have only raised a seed round have a 12% probability of a successful exit (IPO or acquisition)
- Startups that raise a Series A have an 18% probability of success
- Startups that get to Series B or later still only have about a 50% chance of success
Clearly, making it to unicorn status is incredibly difficult, even for well-funded startups. According to Chase Spenst, startup advisor, "the earlier on the failure, the more likely it‘s because of an internal issue." Early-stage startups tend to fail due to factors like flawed assumptions, lack of market validation, or co-founder disagreements. Later-stage failure is more often a result of external factors like worthy competitors or market shifts.
Strategies for Mitigating Failure Risk
While there‘s no way to completely eliminate the risk of failure, startup founders can take several steps to improve their odds:
- Do extensive market research and validation before building to ensure you‘re solving a real problem for a large enough market.
- Have a solid financial plan with plenty of runway and be extremely disciplined with burn rate. Raise more than you think you need.
- Prioritize building a strong, diverse team with complementary skills. A mediocre team will build a mediocre product.
- Thoroughly analyze your competitive landscape and have a clear path to differentiation. You must give customers a compelling reason to choose you.
- Constantly communicate with target customers and quickly iterate your product based on their feedback.
- Be mentally and strategically flexible enough to pivot your business model or target market if needed. Many successful startups look very different today than when they started.
- Learn from the mistakes of other failed startups in your space. There‘s no need to repeat preventable errors.
Lessons from High-Profile Failures
Even the most promising, well-funded startups can fail. Let‘s examine a few recent examples and extract key lessons:
- Theranos raised $700M to build blood testing technology that never worked as claimed. Lesson: Ensure your core product actually works and don‘t mislead investors or the public.
- Quibi raised $1.75B for short-form mobile video content but shut down within 6 months of launching. Lesson: Validate customer demand for your product before raising huge sums.
- Pets.com raised $83M but went bankrupt in 2000 after spending heavily on advertising despite lack of a path to profitability. Lesson: Prioritize sustainable unit economics over growth at all costs.
- Juicero raised $120M to build a $400 juicer that just squeezed juice packs you could squeeze by hand. Lesson: Make sure you‘re building something people actually want and will pay for.
Embracing Failure as an Entrepreneur
While no one wants their startup to fail, the reality is that failure is an inevitable part of the entrepreneurial journey for most. Reframing failure as a learning opportunity is critical for long-term success. Many of today‘s top entrepreneurs had multiple failures under their belts before their big win.
Each failed startup can teach invaluable lessons that make you stronger and more equipped for your next venture. You‘ll learn how to build a great team, how to validate ideas, how to create a business model, how to inspire investors, and so much more. Above all, you‘ll develop grit, adaptability, and grounded optimism—key traits of resilient entrepreneurs.
Conclusion
The odds may be stacked against startups with 90% failing but that doesn‘t mean you should throw in the towel. By learning from the mistakes of the startups that have come before you and implementing some of the failure prevention strategies outlined in this post, you‘ll dramatically boost your chances.
Even if your current startup doesn‘t work out, the skills, experience, and relationships you build along the way will propel you forward. One thing is for certain—every failed startup makes you that much more likely to succeed in your next endeavor. Embrace the journey and stay the course. The road may be long and winding with an end you can‘t yet see, but the view at the top will be worth it.
