Home / General Knowledge / Entrepreneurship / Why Do So Many Start-ups Fail? Two Surveys Highlight Common Factors

 

via Inventors: Failure can be defined in many ways, but the factors involved are often consistent.

Other than selling your invention outright, the two primary ways of making money from your invention are licensing it in return for royalties or becoming the “entrepreneurial inventor” and starting a small business to produce your invention and market it yourself.

The February 2018 Inventors Digest, which focused on start-ups, began its coverage with statistical evidence of the formidable challenges facing newcomers. Inventors need to understand the “start-up world” if they choose this invention commercialization approach.

Start-ups are risky and don’t generally have a very high success rate. In a 2012 Wall Street Journal online article entitled “The Venture Capital Secret: 3 Out of 4 Start-Ups Fail,” author Deborah Gage cited some interesting statistics from a research study conducted by Shikhar Ghosh, a senior lecturer at Harvard Business School.

Ghosh examined data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 to 2010. He noted that the definition of failure in these situations can vary. If failure means liquidating all assets, with investors losing all of their money, an estimated 30 percent to 40 percent of high-potential U.S. start-ups fail, he said. If failure is defined as failing to see the projected return on investment—such as a specific revenue growth rate or date to break even on cash flow—more than 95 percent of start-ups fail.

Gage mentioned several other studies of interest in this context of “start-up failure.” For example, among all companies, about 60 percent of start-ups survive three years and roughly 35 percent survive 10 years (per separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit that promotes U.S. entrepreneurship). Also, companies that didn’t survive might have closed their doors for reasons other than failure—i.e., being acquired, or the founders chose to move on to other ventures.

Post-mortem reasons
But why do start-ups fail, by any definition? Several “post-mortem”-type surveys and studies can shed light on what happened and why.

A survey was conducted of founders involved in 32 start-up failures to summarize the top 20 reasons; results were published in early January 2011 on Chubbybrain.com. To touch on the major highlights, these were the top 10 among those 20 reasons for start-up failure:

  1. Ignoring customers—Being inflexible and not actively seeking or using customer feedback.
  2. No market need—Building a solution looking for a problem, i.e., not targeting a market need. (Note: This illustrates the reason inventors should make sure their invention solves a problem that enough people care about and are willing to pay for a solution.)
  3. Not the right team—Not the right mix of skill-sets, and inadequate checks and balances among founding team members.
  4. Poor marketing—Not knowing the target audience and not knowing how to get their attention and convert them to leads and ultimately customers.
  5. Ran out of cash—Money and time are finite and need to be allocated judiciously.
  6. Needed a business model—Lack of a well-defined business model that could be implemented. (Note: This is why inventors must have an invention business plan. If necessary, get university and college business school assistance in the preparation of the plan.)
  7. Product mistimed—Need to understand the “window(s) of opportunity” and release the product and/or service accordingly.
  8. Lacked passion—Not enough genuine interest in the entrepreneurial pursuit.
  9. Failure to pivot—Pivoting away from a bad product or service, a bad idea, a bad decision, a bad hire, etc., quickly enough. Didn’t take corrective action soon enough.
  10. Poor product—Tried to provide a “user unfriendly” product or service that didn’t adequately meet customers’ needs.

Similar reasons cited

Another survey was reported in an article entitled “Why Startups Fail, According to Their Founders,” by Erin Smith on Fortune.com in 2014. The reference was to an analysis conducted by CB Insights (a New York-based venture capital database company) of 101 post-mortem essays by start-up founders to pinpoint the reasons they believe their company failed. Those top 10:

  1. No market need (42%)
  2. Ran out of cash (29%)
  3. Not the right team (23%)
  4. Got outcompeted (19%)
  5. Pricing/cost issues (18%)
  6. Poor product (17%)
  7. Need/lacked business model (17%)
  8. Poor marketing (14%)
  9. Ignoring customers (14%)
  10. Product mistimed (13%)

Sound familiar? In those two surveys, conducted approximately three years apart and with different samples, eight of the 10 reasons for start-up failures were the same: ignoring customers, no market need, not the right team, poor marketing, ran out of cash, needed a business model, product or service mistimed, and poor product or service. These are the red flags that must be considered by the entrepreneurial inventor in planning his or her business start-up.

Why experience matters

Scott Shane put this into perspective, emphasizing the importance of experience, in his September 2011 article “Why Do Most Start Ups Fail” in Startup magazine. “Not enough entrepreneurs have experience in the industries in which they are starting their businesses—specifically, a sizeable fraction of entrepreneurs start businesses in industries in which they have no work experience.”

And consistent with the shared results from the two surveys cited, he wrote: “Many entrepreneurs fail to take the actions that research shows help businesses survive. Academic evidence shows that putting in place careful financial controls, emphasizing marketing plans and writing a business plan increase the odds that a new business will survive, yet many founders fail to write plans, have inadequate financial controls and don’t focus on their marketing plans.”

Because these are skills that most inventors don’t have, they need a team of people with the right mix of skills and experience. Shane noted that “some start-ups fail because of factors beyond their founder’s control, but responsibility for much of the high failure rate of new businesses lies with the entrepreneurs themselves.”

So heed this reminder from Nolo.com when it comes to the advantages and disadvantages of marketing and manufacturing your invention: “The financial rewards are potentially much greater—which is precisely why it appeals to more entrepreneurial inventors. On the negative side, manufacturing and marketing are incredibly risky, and can cause tremendous anxiety and engulf your personal life.”

 

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