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Developing and finally launching a minimum viable product or MVP is challenging, but so is maintaining your startup. It’s best to learn the ropes before your startup fails because it will be harder to salvage later on.
There’s a lot to cover in this ultimate report on startup failure rates. Let’s get right into it.
Introduction to Startup and Why It Usually Fails
Startups belong to the small businesses category because they are usually composed of 500 employees or less. The lucky ones are able to succeed tremendously in their first few years, but most startups fail and don’t make it past their first year.
How Many Startups Fail?
About 90 percent of startups fail, in general. It’s kinda overwhelming and intimidating, we know. But here’s the breakdown of this statistic.
Startup Rate Statistics
Let’s first check out the numbers that constitute the startup rate statistics.
About 70,762 startups are from the United States. Most startups are in the financial technology industry, making up 15.19 percent. And while only 0.6 percent of startups were engaged in agricultural technology in 2017, the shutdown caused by the pandemic is allowing this sector to grow to be a $30 to $35 billion dollar market by 2025.
There are many reasons why startups fail. But the 90 percent failure rate of startups is true across different industries.
About 42 percent of startups don’t make it because they misread the market trend, while 29 percent don’t have enough funds to continue running their startup after the launch. Even if they do have the resources and are able to understand the market trend, 10 percent of failed startups can’t keep up with the competition. Another 23 percent say that they didn’t have a good founding team, to begin with.
When summed up, the total exceeds 100 percent since companies who participated in the interviews gave more than one reason for their startup failure. Regardless, the top three reasons revolve around the market, the funds, and the competition.
The survival rate of startups decreases as the years go by. But even with a looming failure rate, there’s still a 10 percent chance of success.
Almost half of the startups who participate in Series A funding need around $400k a month for their operations. But 82 percent of successful startups made it with the right credentials even with insufficient funding. From this, 30 percent of founders who already have a successful startup are likely to succeed in their next venture, too.
In 2016, a successful average-sized startup could reel in up to 178 percent revenue in its first year. But these numbers reduce significantly by half in the succeeding years if there is a lack of innovation and mishandling in the company. Even so, it follows that high-growth companies can afford to offer more percentage revenue to their shareholders than mid-growth startups.
Startup valuation continued to increase from 2010 to 2018. We can expect this trend to continue in the next few years, too. But keep in mind that paying attention to the sales and marketing strategy facilitates growth more than product development.
5. Funding & Facts
More than 95 percent of startups get funds outside venture capital (VC) investments. That is because there are 15 other sources of money that you can consider. In fact, 77 percent of startups run off of the team’s personal savings.
Startup funding in 2022 can go from $21.5 million in Series A funding to as high as $100 million in Series C. But this also means that the competition and stakes are higher. Thus, it’ll be more challenging to secure funds.
6. Small Business Starting Costs
According to the US Small Business Administration, home-based franchises and microbusinesses cost around $2000 and can go as high as $5000 to start. There are 14 business startup costs that founders should be aware of, so you can plan out your expenses more effectively.
Know how to calculate your startup costs with this fillable PDF spreadsheet that you can download from SBA’s website.
Building a team takes up to 40 percent of a founder’s time. Your team is an important component of your business. In fact, 18 percent of startups fail because of team issues.
According to Harvard Business Review, a team member’s previous experience is less critical to a startup’s success. Rather, it is the collective passion and dedication to continue moving forward that propels a business to greater heights.
8. Demographics & Diversity
Only 26 percent of startups actively promote diversification in their leadership teams, according to Silicon Valley Bank. This number is pretty low, considering that a well-managed divergence of cultures, personalities, and skills is a necessary ingredient towards innovation.
In a 2019 report, 77 percent of startup founders were Caucasian or White. And more than 80 percent of the global venture dollar volume went to male founders. But in 2020, female-led Fortune 1000 companies reported 226 percent returns, which is significantly higher than others.
Failure Rates of Startups
If you haven’t already, make sure to read up on the top reasons why startups fail. Doing so will help equip you with the most important characteristic that a startup should have, even if the business fails—team versatility.
By definition, scale-up startups are those that have gone through and survived the high-risk ideation phase.
According to a Wall Street Journal article by Shikhar Ghosh, 7.5 out of 10 companies funded through venture capital investment fail. Consequently, up to 40 percent of VC investors lose every penny they spent on a failed scale-up.
According to the SBA, there were 32.5 million new businesses in the United States in 2021.
Specifically, here are the failure rates for new businesses per year.
Ninety percent of startups fail. This statistic has remained consistent throughout the years, regardless of the economic situation. However, due to the COVID-19 pandemic that spread in 2020, 41 percent of the failed businesses have closed for good.
Startup Failure Rate by Industry
Across all industries, 9 out of 10 startups fail, with less than 50 percent of startups failing to make it past their first year. However, chances of success and survival are higher in the basic needs industries. Those who succeeded in their first year in this business were able to continue operations for four years.
Finance, Insurance & Real Estate
In real estate alone, the failure rate is a whopping 90 percent, which means 9 out of 10 agents fail to make it in the business. But financial technology has made this failure rate more manageable.
Only 58 percent of startups in finance, insurance, and real estate continue to operate four years after their launch. Failure is not uncommon in this industry. With 75 percent of the players serving retail clients––Gen X and millennials––this failure rate doesn’t faze them at all.
Health & Education
Healthcare and education are basic necessities. Even so, only 56 percent of the startups in these two industries continue operations after four years. The rest are bound to fail and there are different combinations of reasons why.
|Reasons why startups in education fail||Reasons why healthcare startups fail|
If you’re planning on starting a biotech company, you should read up on how to build and how to start one.
Food and Agriculture
Likewise, startups in the food and agriculture industry have the same probability of failure with healthcare and education. Since food is not something that we can just dismiss from our daily lives, failing in this sector and bouncing back are common occurrences.
According to this restaurant failure rate study, 23 percent of startups fail in the first year. This coincides with the 20 percent reported failure rate of new businesses that was mentioned previously.
While the percentage of startups engaged in agricultural technology (AgTech) was only 0.6 in 2017, this sector already has a unicorn valued at over $1 billion, Indigo Agriculture.
Service-based startups are more likely to earn revenue faster than startups that sell products. In fact, this type of startup is the market leader in India, which is the third-largest startup playing field. With a 45 percent failure rate, it is still possible to push through this manageable risk.
It makes sense that with the Digital Age, more and more people have become interested in starting a business in the information technology sector. This also suggests that the competition is fierce due to the growing demand. A weak startup can easily be part of the 37 percent that don’t make it in the information technology sector.
How to Avoid Startup Failure
No one wants to fail. But it’s better to fail after trying than to never try at all. Imagine the regret you’ll feel if a startup becomes successful with an idea you once had but never acted on.
While we can’t fully avoid a startup failure, here are some actionable steps that you can take to cushion the blow.
Most startups skip this essential first step—research. Going into battle unprepared and unequipped is never a wise thing to do. So, we highly suggest that you scout the field or industry first, gauge the current competition, and prepare an arsenal of sturdy backup plans, just in case.
2. Set Your Goals
Through your research, you set realistic goals to be your North star. Realistic means your targets are achievable so you are able to apply a healthy amount of pressure on you and your team. You can have ambitious goals, but break them down into tiny, more munchable tasks to get there slowly but surely.
3. Enjoy What You Do
Setting hard goals can sometimes take the fun out of what you do. This is why we highly recommend that you be kind to yourself and take little breaks every now and then to avoid getting burned out. Whether or not this breaks your momentum totally depends on how disciplined you are when taking breaks.
4. Never Quit
It’s easy to say, “I’m done”, when things go awry. But with achievable goals and enough break time in between to prevent burnout, quitting won’t be your first thought every time things go bad. Just take one step back, reassess what happened, and come up with a plan to bounce back. You’ll be taking two steps forward again soon.
You Might Ask
Why do 90 percent of startups fail?
Ninety percent of startups fail because they stopped innovating. Whether it’s unintentional or not, continuous product development is a critical task in any startup. It keeps the momentum ball rolling to keep the startup on its toes and reach greater heights.
What is the estimated failure rate of startups in 2020?
The estimated failure rate of startups in 2020 remains at 90 percent, across all industries.
How do you know a startup is failing?
A failing startup, almost always, experiences one or more of these warning signs:
- Lost sight of its goal
- Unsatisfactory execution
- Poor customer engagement
- Waning teamwork
- High and fast employee turnover rate
- Difficulty in adapting
- Stagnant product development
- Mismanaged finances
What industry has the highest failure rate?
The real estate industry has the highest failure rate of 90% with 9 out of 10 agents withdrawing from the business.
What makes a successful startup?
When properly managed, these six factors make a successful startup:
- A strong team
- A competitive business model
- A little more than sufficient capital, at the very least
- A well-thought-out backup plan and cushion response
- An updated marketing strategy
- Good implementation
What happens if the startup I invest in fails?
If the startup you invested in fails, the chances are high that their financial loss is also yours. A good backup plan can help prevent all the money from going down the drain. If nothing else works for you, you can try selling your startup before it really hits the ground.
With a slim success chance of 10 percent, startup founders should be aware that they won’t always have a good run when they start a new business. But if you believe that your MVP is worth investing your money, time and effort on, then stumbling from time to time shouldn’t faze you. Get back up and try again until you perfect your formula for success.