According to a 2017 report in the Financial Times, only 53.7 percent of companies founded in the UK throughout 2013 lived past their three-year milestone, a statistic which drops by around 3.6 percent if your startup is based in London. However, just because you set up shop in the capital, that doesn’t mean you’re guaranteed to succeed.
Blippar, the London-based technology company specialising in augmented reality, proved that back in December 2018 when it went into administration having burned through $120 million in funding.
Most would acknowledge that founding a startup is no easy feat, often requiring years of hard work and sacrifices on behalf of the majority of determined entrepreneurs who were born silver spoonless. This means that when the inevitable does happen for the majority of these new business ventures, it can hit founders pretty hard.
However, it’s important to remember that failure is subjective term; there are almost as many reasons for startups to stop trading as there are the number of new businesses popping up every year.
In basic terms, it means a startup has closed down operations, but 'failure' could also mean that it didn't return on investment, or that it pivoted so hard away from its initial aim that it became a new startup altogether. For example, is Stewart Butterfield's Slack a startup success story, or was Glitch a failure? It isn't black and white.
What’s more, startups, like any endeavour, don't fail for a single reason. CB Insights outlines this at the very start of its 20 reasons that startups fail report: "One – there is rarely one reason for a single startup’s failure. And two – across all these failures, the reasons are very diverse." The whole report is required reading for anyone in the industry.
Here is a quick run-down of the most commonly cited reasons for a startup failing, and hopefully how to avoid making the same mistakes.
Lack of market fit
CB Insights data shows that a massive 42 percent of startups that took part in its survey cited "lack of a market need for their product" as the reason for failure, making it the most significant reason cited. The report states: "Tackling problems that are interesting to solve rather than those that serve a market need was cited as the number one reason for failure".
The technology may be brilliant, but if you have no clear route to market your startup is destined to fail. Basically, if you don't have a clear business plan the idea isn't worth protecting.
George Northcott, head of business development at London startup accelerator Founders Factory, says: "Lots of startups we see find themselves building products that no one wants or there was no market need for. Make sure your company solves a problem and that that problem is big enough to be worth paying for it to be solved."
Bad business model
This is a similar reason for failure, but with some subtle differences. The recent rise of the artificial intelligence or machine learning startup is a good example of smart founders scrambling to find ways to apply the technology to a specific domain, with extremely mixed results. Most AI startups today, with a few notable exceptions, still feel extremely early stage and have very few actual customers.
This is an experience Robert Tregaskes had first hand with his (now defunct) startup Shnergle. "Fundamentally our business model just wasn't going to work. We couldn't pivot to something adjacent as there wasn't really anything adjacent," he says.
Andrew Griffin CFO at Bloc Ventures says: "Jumping on a bandwagon business model is not a business plan. Describing yourself as “SaaS” or “The Uber of….” (recent favourites) is not actually describing what you do, who your customers are, or how you make money."
Running out of cash
A favourite term of Silicon Valley is 'burn rate'. This is the rate at which a startup spends money on overheads before generating a profit. Burn rate isn't necessarily a killer (Uber is still burning cash at a historic rate) but it can't be left unattended to.
"Think in your personal life, how much money you could waste eating out or going to parties. Now imagine that, but running a company: paying salaries, paying for services, lawyers and rent. You can start burning some serious cash extremely fast. It doesn't matter how rich you are, you can burn all of it if you aren't careful. Even if you're minted I'd take a very cost-conscious approach. Because if you don't you're either reckless or an arsehole," Tregaskes says.
Griffin says: "I don’t have a problem with years of forecast losses as long as there’s a plan to make money at some point, and a good handle on cash burn in the mean time. The closure of Zirtual [in 2015] I think marked peak financial illiteracy in the startup world, when the CEO said: "Burn is a tricky thing that isn’t discussed much in Silicon Valley…if you earn $100 but pay out $150, your burn is $50".
Having the wrong team
It is tempting during the good times to bolster your team, with headcount often being equated to successful growth. Hiring talent creates good feeling and can boost morale.
However, as Farah Kanji, head of talent at startup accelerator Founders Factory said: "I see ‘dead wood’ as a reason for startup failure. Firing is just as important as hiring great people. As soon as you realise you’ve hired the wrong person, let them go. No matter how hard it is to find their replacement."
Alistair Shepherd, founder at recruitment tech startup Saberr said: "Life at a startup often means working in small teams, in close quarters and within highly stressful environments. Interpersonal relationships and team dynamics often fall low down the priority list for startup founders and managers, but this shouldn’t be the case."
You may think you are building a brilliant, unique product, but no startup is created in a vacuum and sometimes you just have to launch in beta to see what you have and avoid being beaten to market. Your idea may end up creating the market, but that doesn't mean you will be immune to its forces.
Personal finance startup Wesabe was quicker to market than Mint in the early 2000s, but never capitalised on being first, allowing Mint to swoop in and dominate. Mint was eventually acquired for $170 million, while Wesabe had to shut down.
Making false promises
One of the more cautionary tales of the last year in Silicon Valley has been Elizabeth Holmes and the health tech startup Theranos.
Theranos burned brightly since being founded by a nineteen-year old Holmes in 2003, being valued at a 'what on earth were they thinking' $9 billion dollars at its peak, until it all came tumbling down. Nick Bilton has detailed how the house of cards came down for Vanity Fair here, but in a nutshell Holmes overpromised on what her technology could do in the hope that she could get it to work somewhere along the way. She failed.
Dealing with legal issues
A legal challenge can range from being a minor distraction, like having to change your name, to effectively halting your entire business.
UK Martech startup Yieldify was accused of stealing and copying code from Bounce Exchange in the USA and has had to concentrate a huge amount of effort on fighting these court battles instead of its core business throughout most of 2016, before settling in July of that year. The experience didn't kill them, but it probably didn't make them stronger.
CB Insights notes the example of music startups like Turntable.fm having to spend their time and money fighting against rights infringements rather than acquiring customers in the tricky music streaming industry.
Tinder cofounder Sean Rad and Twitter's Jack Dorsey may have managed to get back in after being ousted from their startups, but being forced out of your own company is a serious concern for founders.
If, like us, you’ve been following the evolving story of WeWork, you would have seen that the saga has resulted in CEO and co-founder Adam Neumann and his wife being removed by investors in order to try and recoup some of the massive financial losses the company has sustained.
Try not to feel too sorry for Neumann though. His punishment for tricking investors into believing he had a profitable business model? A reported $1.7 billion.
There are many reasons why this happens: not being up to the task, being a better engineer than a leader, backing investors into a corner or just plain arrogance.
What you tend to hear from successful startups is that balance is important: every Jobs needs a Woz; and if you have the perfect founding team, try not to antagonise your investors.
Global expansion is an obvious aim for most businesses however, it’s important to do your homework before you start moving into different markets.
If you don’t understand the culture of the country, how the market operates and the fundamental differences between how business is conducted in the country you're based in and the locations you’re hoping to expand into, you're doomed to fail.
Meetro, a multi-network social messenger app which shut down operations in 2007, responded to CB Insights’ survey claiming that what it failed to realise when expanding was that “having hundreds of active users in Chicago didn’t mean that you would have even two active users in Milwaukee, less than a hundred miles away, not to mention any in New York or San Francisco”.