The 3 Most Common Reasons Why Startups Fail

Startups are incredibly difficult to build, and the overwhelming majority fail. Within those failures, the same issues are often repeated. Here are the 3 most common reasons why startups fail and how to avoid those pitfalls:

Co-Founder Issues

What: Co-founders having constant and serious disagreements that spill over into team discussions. A lack of respect amongst the co-founders. Incompatible communication styles between co-founders. Co-founders working on unrelated projects because they disagree on the current strategy.

Why: Spending hours in heated debates means you’re not making progress on your product, and dividing your efforts reduces iteration speed significantly. Serious and public disagreements can negatively influence team retention and hurt recruiting. Thus, if you’re not making good progress on your product and you cannot retain people, your startup will not grow. This is the most common cause of death for early-stage startups.

How to Avoid: Weekly 1-on-1 meetings between co-founders where you don’t discuss project status, only your thoughts on the working relationship that week. It can also help to bring in a 3rd party mediator. These might be investors, executive coaches, or relationship therapists; whatever works for you.

Overspending

What: Spending cash assuming a fundraising round is guaranteed. Lackluster customer revenue. Raising millions and hiring a huge team immediately. Delaying cost cuts in a crisis.

Why: Many founders assume fundraising or customer revenue will come automatically. However, for most, cash flow takes much longer than expected, and it’s easy to run short on capital reserves. Some spend big on a large team with expensive benefits after closing a round; these founders usually have to do layoffs to survive. Other founders delay cost-cutting measures hoping for an unlikely acquisition or a term sheet, giving up their final chance of survival.

How to Avoid: Use realistic projections when planning how you will grow and spend. Adjust these projections and the rates of growth based on the real numbers you’re generating each month. If those updated projections paint a bleak picture, adjust expenditure early.

Lack of Focus

What: Shipping products with numerous, complex features. Launching several products at once. Distributing to multiple customer profiles. Frequent product pivots.

Why: With extremely limited resources, a startup can only hope to provide a great customer experience for a narrowly defined product, initially. Spreading your team across numerous features, products, and customer profiles dilutes your ability to provide high-quality customer interactions versus competitors. Plus, you’ll need to be committed to your idea, as it can take months to get positive customer feedback.

How to Avoid: Build your product to solve an important but narrow problem, ideally for a niche customer. Then, resist expanding to other customer profiles without both a stable product and overwhelming demand. If you need to pivot, make sure you’re committed to an idea for at least 6 months to give it a fair chance of success.

There are many ways startups can fail, but some of the most common ways can be avoided. By making yourself aware of the issues others frequently encounter, your startup will have a better chance to survive and thrive.

Thanks to Kaego Rust for their help with this article.

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Ash Rust

Ash Rust

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Pre-seed Investor. Email: ash@sterlingroad.com. B2B, US only. I work with founders for 3 months before investing. More info: http://SterlingRoad.com/process