Around the Internet circulates a scary statistic – “9 out of 10 startups” fail during their first year.
With startups defining a new-era corporate culture it seems like the 10% success rate makes it futile to even think about creating a startup business.
Why would a sane person give up the safety of a mid-level 9-5 for the almost certain life of a failed startup entrepreneur?
Well, for starters (no pun intended), because the “9 out of 10 startups fail” statistic is a failure itself.
With the modern possibilities for creating viral content, it is easy for false facts to spread around.
Such is the case with the 90% startup failure rate.
And to make matters worse, when you do a search for “startup failure rate” the first title that you see is “90% Of Startups Fail: Here’s What You Need To Know About The 10%”.
What’s more, the article, written by one of the top digital marketers – Neil Patel, shows up on Forbes.
Despite the news outlet’s warning that “Opinions expressed by Forbes Contributors are their own”, Forbes’s logo on top of the page gives a huge credibility to the article.
You might be wondering “if this mythical number is incorrect why do people still cite it”?
Because of its inherent dramaticism.
“90% of startups fail” is:
- Great for click-bait titles.
- A confidence booster for the ones whose startups do make it.
- A confidence booster for the ones whose startups do not make it. It is so easy to say: it’s not my fault, the statistic says that I only had a 10% chance of success. Yet, the facts say otherwise.
Keep reading, because in the next paragraphs I’ll present to you two important aspects of the world of failed startups:
- Why it is wrong to say that “90% of startups fail” and what is the real number.
- How common startup problems lead to startup failure and how to solve them.
Why it’s wrong to say that “90% of startups fail.”
Because it is not true. Period.
I did some backtracking to the original source of this “statistic”.
Here is the result.
In 2013, Eric. T. Wagner, an entrepreneur and Forbes contributor, published an article titled “Five Reasons 8 Out Of 10 Businesses Fail”.
Wagner starts the piece with:
Breaks my heart.
According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months.
The article includes a link to Bloomberg’s home page but not to the study that claims such a high startup failure rate.
I did search Bloomberg’s archives hoping to find the original source of this percentage but to no avail.
There is no article on Bloomberg that claims “8 out of 10 entrepreneurs who start businesses fail within the first 18 months.”
It is possible that the publication took down the research.
It is also possible that someone made up this study and was lucky enough to have this false information picked up by an influencer who spread out the “facts” without vetting them.
Truth falls victim to Internet’s virality all the time.
In the quest to top SERPs and attract social media shares it is convenient to make a claim without giving much weight to its truthfulness.
But in this case, the claim is a bold one and too important to let it live on, though for some, it might not be a big deal.
False facts appear online all the time.
But they die out as quickly as they came to rise because all it takes to kill them is to trace back the original source.
With the startup failure rate that is circulating around the web, there is no original source.
Yet, this number sprays around on reputable publications, topping SERPs.
Why is this a problem?
Because nowadays every decision people make, be it looking for an advice or gaining knowledge, starts on the web.
And when aspiring entrepreneurs search the web for their chance for success, and they see that it’s at 10%, that’s when the world loses on innovation.
And the real number is…
Hence, below I’ll present the findings of four studies on business and startup survival rate.
US Bureau of Labor Statistics
According to data from the US Bureau of Labor Statistics, 80% of US businesses make it to their second year.
This leaves a failure rate of 20%.
55% of the companies are still running after 5 years of existence.
35% make it to the 10th year.
20% make it to the 20th year.
Which means that even after 20 years in business, 2 out of 10 companies will still exist, giving a failure rate of 80% for a 20 year period.
Quite the difference compared to the grim and made up statistic of 90% failure rate.
What’s more, the survival rate data doesn’t say why businesses close down.
For example, the data includes owners that didn’t fail, but made enough money to retire and close down their business.
Shikhar Gosh, Harvard Business School
The main problem with studies is the lack of common understanding of the problem and how to measure its impact.
Such is the case with startup failure rates.
In 2012, Shikhar Gosh – a lecturer at the Harvard Business School, pointed out the lack of coherence in an article by the Wall Street Journal which reported on his findings.
“If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail”, Gosh said.
According to the WSJ article, The National Venture Capital Association puts that number at 25% – 30%.
The scholar also points out that if failure is defined as a startup not meeting original growth projections, then “more than 95% of them fail”.
These two numbers serve a great purpose of pointing out that startup failure might be confused with failing to meet preset goals.
Gosh’s scope of research was on startups that received funding between 2000 – 2010, so let’s see what more recent studies have to say.
Last year the financial website Credit Donkey did their own research.
A disclaimer before I present you the results – the article first mentions businesses, then startups.
So, it’s not completely clear whether the study presented data about startups only or all types of businesses.
Nevertheless, here are the findings.
1st Year – Approximately 21% of startups that opened in 2000 failed within the first year of doing business.
5th Year – The five-year mark is a danger zone for many startups; just 48% of the businesses that were founded in 2000 made it this far.
The verdict: first year startup failure rate is 21%.
Still far from 90%, so on to a research from 2017.
The following data comes from the research company Statistic Brain and is based on findings by Entrepreneur Weekly, Small Business Development Center, Bradley University and the University of Tennessee.
The study shows that only 25% of startups didn’t make it past year 1.
After 5 years, the number grew to 55%.
The worst performance came from companies in the Information industry, of which only 37% were operating after 4 years.
The best results come from financial services and real estate where close to 60% were still operational after 4 years.
What conclusion can we draw from these four studies?
That first year business failure rate is 20%.
Shikhar Gosh’s research specifically targeted startups and shows a failure of 30% – 40%.
Note that the publication of his research doesn’t specify whether this number represents liquidating all assets during the first year of operation or during the lifetime of the startup.
These studies show that whether a startup fails depends on which side of the fence you are.
If you are an investor and don’t get back anything from your money, then your investment was a failure.
But, if you are the startup founder and, despite making your investors really really angry by losing all their money, you still manage to keep afloat, did your startup really fail?
This one’s really dependent on personal perception.
Now, let’s see why do startups fail.
Two common problems lead to startup company failures.
They are poor research and poor communication.
When it comes to the first main reason why startups fail – poor research, it is often overconfidence that leads to the tragic outcome.
The overconfidence factor can present itself in the pre or post launch stage, or even both.
What do I mean with that?
Well, the founders are either overconfident that people need their product, i. e. overestimating market fit, or they become too confident in their product post-launch and scale way too quickly.
This leads to higher costs/smaller margins and starting a competition war with the big dogs.
When you are just a small puppy and your owner gets you a shiny new collar (read: receiving a generous investment round) it is way too easy to get carried away and get involved with the big dogs.
When it comes to the second main reason for startup failure – poor communication, it goes two ways.
The first way is not communicating well the “big idea” to major stakeholders, like investors.
The second way is not communicating well the big idea to potential customers.
To prove or dispell the claim that the main reasons for startup failure are lack of proper market research and poor communication, I picked at random 10 failed startups and looked at the reasons for their failure.
Here are the 10 random picks of failed startup stories:
Wantful – online gift-giving service.
Reasons for failure:
- A major investor backed out of the deal.
- Expanded to new market niche and couldn’t handle the competition.
- Couldn’t secure more investment rounds.
RewardMe – CRM solution
Reasons for failure:
- Couldn’t match competitor’s fundraising.
- Didn’t have access to an incubator.
- Listened to the wrong people.
Homejoy – online platform for cleaning services.
Reasons for failure:
- Less than 10% of the customers used the services after 6 months.
- High cost of acquiring customers.
- Employees dropped the middle man (i. e. Homejoy).
- Scaled too quickly.
- Hit with employment-related lawsuits.
- Lack of market fit for some locations.
Berg – cloud service.
Reasons for failure:
- High pricing.
- Couldn’t achieve a sustainable business.
Alikolo – e-commerce marketplace.
Reasons for failure:
- Inexperienced shareholders.
- Couldn’t secure the second round of funding.
- Lack of experience in running a company (as per the founders’ words: “Now I know I did everything wrong. […] I should have done my research […]”).
Brisk – online tool that consults salesmen.
Reasons for failure:
- Lack of focus.
Zirtual – virtual assistant services.
Reasons for failure:
- Scaled from independent contractors to employees and incurred higher costs than profits.
Last Guide – a mobile app.
Reasons for failure:
- Strayed away from the initial plan.
Stereomood – music curation.
Reasons for failure:
- Unsustainable business model.
Dinnr – food delivery service.
Reasons for failure:
Here is the real statistic.
Ten out of these ten startups didn’t make it because of one or both of the main reasons for startup failure – not preparing or not communicating well enough the idea behind the startup.
But why are these problems so significant that they have the power to break an otherwise great (at least in the founder’s mind) idea?
Because we are lazy. But not that much.
We are lazy and always looking for an easier way to do things.
We order toilet paper with the push of a button.
Speak to our smartphones so we don’t have to type.
Go through the bank’s drive-thru so we don’t have to get out of the car.
Speaking of cars, the booming market for self-driving cars shows that we are getting too lazy even to drive ’em.
And there is nothing wrong with that.
Why shouldn’t we look for a more convenient, hassle-free way to do things?
For ages, people were frowning upon the advances in consumer technology as something that is degrading human’s intelligence.
The same people that would throw their clothes in the washer.
The same ones that would rather pop a TV dinner in the microwave than spend hours slaving over the stove.
I’ve never heard somebody complain that they no longer have to wash the dishes by hand.
I’ve never heard somebody complain that they no longer have to beat whipped cream by hand.
But, I’ve also never heard anybody complain that they need a QR scanner to squeeze their juice.
And here comes the first main problem that causes startups to fail – not doing enough research.
Market valuation only goes so far if all it takes to bust your bubble is one article on the web, albeit written by a reputable news source.
Yes, Juicero, I am looking at you.
And, yes, I am also looking at you Pokemon Go, quietly sulking in the corner next to Fidget Spinner.
You fell victim to the hype culture that thrives on overestimating market needs and underestimating market research.
We need to communicate.
Well, not necessarily to communicate, but we do need communication.
In other words, we might not feel like informing, but we do like to be informed.
So what happens when we do not get the information that we desire or need?
We make irrational choices.
Like buying on impulse only to return the purchase a few days later.
Like speaking based on emotions and perceived outcome rather than on real facts.
And this is why startups fail.
Because the teams behind them don’t communicate enough with the major stakeholders.
Namely, investors and potential customers.
If a startup founder doesn’t present a compelling case before the investors, it fails.
If a startup founder doesn’t present a compelling case before potential customers, it fails.
Hence, it is vital for the teams behind startups to communicate not only with each other but to the people who hold in their hands the faith of the venture.
It might sound easy, but finding the right words and expressing them in a compelling way is a tough job.
It is especially tough for startup founders who often work alone or with a very small team.
In between brainstorming sessions, meetings, and unexpected complications, startup founders can rarely find the time to execute communication strategies.
This is why it’s a good idea to ask for some assistance.
Generally, startup owners have four options when it comes to implementing communication strategy – DIY, build an in-house team, hire an agency or turn to a freelancer.
But this is a topic for another time.
How to solve common startup problems?
In 2000 Ben Huh was fresh out of college and looking to enter the entrepreneurial world.
He created a software analytics company called Raydium and managed to secure two rounds of funding for $750 000.
After 18 months and minus $750 000, Huh realized that his venture won’t work out.
Fast forward to 2007 and Huh bought a website called “I Can Has Cheezburger”.
The site featured funny cat pictures and was getting around 15 00 000 page views per month.
Huh managed to grow it to a meme network that receives 500 000 000 monthly hits.
In 2011 he secured venture funding for $30 mln. to create a meme generation platform.
Evernote has over 200 million users around the world, but the company almost didn’t make it in its infancy.
It was 2008 and the financial crisis was already taking its toll.
Markets were crashing and Evernote’s value dropped by 60%.
Founder Phil Libin had made the difficult decision to give up on the project.
Shortly before he was about to pull the plug, an Evernote user from Sweden contacted Libin.
Apart from thanking the founder for his product, the Swede offered $500 000 to keep the company afloat.
Several years later Evernote became one of the first “unicorns”.
Reddit has become something way more valuable than an internet forum.
Where else have you seen a plethora of celebrities and ultra-successful entrepreneurs answering AMA questions in real time?
But the platform didn’t have initial success, to put it mildly.
After getting frustrated with the zero traffic that Reddit was getting, co-founders Steve Huffman and Alexis Ohanian set out on a “fake it ’till you make it” approach.
The two of them created fake profiles and began discussions on Reddit.
Little by little, the forum received traction from people who got interested in the secretly orchestrated exchanges.
Nowadays Reddit is receiving 8 billion monthly pageviews.
Some startups make it.
Yet, some almost don’t make, but then they do with a bang.
The three startups mentioned above are proof that there is a difference between failed and failing.
Entrepreneurs don’t fail until they do and this only happens after they really run out of options.
Ben Huh was failing.
Then he found an eternal market fit – laughter, and combined it with user generated content.
Phil Libin was failing, but his product was filling a market need.
So a satisfied user showed appreciation with a generous investment at just the right time.
Steve Huffman and Alexis Ohanian were failing, but they understood the importance of communication.
So they spread the word about their business any way they could.
The lessons here confirm that startups don’t fail because “the stats are against them”.
In fact, as noted above, data suggests that more than half of US businesses run for at least 5 years after their creation.
Startups fail when they don’t serve a purpose or when nobody knows about their value.
Of course, this is an oversimplification.
There are many reasons why companies fail like there are many reasons why others succeed.
Nevertheless, most of the time it all comes down to research and communication.
Wrap up – the 90% startup failure rate is a myth.
One might argue that spreading out the myth that “90% of startups fail in their first year” is a good way to “weed out the losers”.
This way the ones that do not believe their idea is good enough to make it to the 10% will keep the coast clean for the ones that are more confident in their ideas.
Yet, as we see, overconfidence is a startup killer.
The number is not correct and spreading it out hurts the startup ecosystem.
The real failure rate is 20%-40%.
But this number is also subjective.
After all, whether a startup fails or not largely depends on what is perceived as a failure.
Is it running out of money?
Not meeting growth projections?
Liquidating all assets?
Studies are subjective, and neither of the ones mentioned here is flawless.
Some didn’t differentiate between a general business and a startup, others didn’t specify how long a startup has before it is considered a failure.
Nevertheless, they all reached an important conclusion – “90% of startups fail” is a myth.
P. S.: If you manage to find the Bloomberg study, please let me know.
What’s your experience with startup failures and successes?
Like, share, tweet and subscribe.
Also published on Medium.