Why Startups Fail | Lessons From 150 Founders

In 2020, we surveyed 150 startup founders to find out what challenges they were facing, why their businesses were failing, and what advice they would give to other founders to ensure their success. After three years of ongoing challenges and amidst a very different economic climate, we conducted the survey again, asking 150 founders what their current reality is like, including what challenges they’re facing and how they would prevent business failure. (This article has been updated with the results from our July 2023 survey.)

Why do startups fail, and what can founders do to prevent it?

Many entrepreneurs and investors opine on this question, but few offer data-driven answers. Our goal is to identify and share clear learnings on this amidst a challenging year for startups.

In the first half of 2023, there were a record number of applications filed for new business formation. While it’s too soon to know how many of those companies will make it, we do know that it’s been a challenging time for entrepreneurs due to inflation, rate hikes, and a retraction in investment. Regardless, nearly a fifth of new businesses shut down in their first year, according to the U.S. Bureau of Labor Statistics (BLS) data.¹

However, fear of failure shouldn’t prevent anyone from starting a business. While outside factors can have an outsized impact, it's important for would-be founders to focus on what they can control and gain every advantage to increase the odds of success.

One great way to raise the odds of startup success is to learn from current and past entrepreneurs. Wilbur Labs surveyed more than 150 startup founders and analyzed data from CB Insights to look for commonalities and patterns. When founders solve significant problems and avoid preventable failures, everyone stands to benefit. In that spirit, we’ll examine why startups fail and how they overcome potential failures. The resulting insights can help founders improve their odds of success this year and beyond.

64% of tech founders reported that their company had faced a potential business failure. On average, tech companies encountered their potential failure after roughly 17 months in business. 75% of founders who faced potential business failures admitted that their company was not adequately prepared to be in business.

Over half of all founders we surveyed believed that running out of money led to failure. Second to that, current founders attribute their failure to the residual effects of COVID-19, inflation, and the looming recession. In other words, the current macro environment has been extremely challenging, putting added pressure on entrepreneurs and their businesses.

Based on an analysis of data from CB Insights, we identified additional reasons that founders cite for failure.² Keep in mind this is self-reported data.

It’s important for founders to focus on what they can control. More than one-third of founders believe that running out of money led to failure. Second to that, founders attribute their failure to a lack of financing or investor interest. In other words, if they managed to generate more revenue, spend less money, and/or raise capital through alternative channels, their startups might have survived.

While running out of money is the final impetus, there are many steps to take before that point in order to firm up operations.

Running out of money seems related to the third most common reason for failure: having a product without a business model. Perhaps founders mistakenly believe that a business model will slow them down or limit their agility. Or, maybe they expect to exit before there’s pressure to be profitable. Such founders are likely banking on their next funding round, an acquisition, or a major enterprise deal for survival. If those don’t materialize, there’s no plan B.

Although most startups cannot expect to generate profits immediately, they should have a break-even point and a plan to reach it. As former Google CEO Eric Schmidt has said, “Revenue solves all known problems.” Revenue can also solve unknown problems, as the COVID-19 pandemic and economic downturns have illustrated.

Revenue generation also proves that a startup is solving a significant problem in a sustainable way. If no one will pay for the solution, more financing won’t necessarily change that. There is simply no better measure of product-market fit and competitiveness than revenue. Based on the data, strong business planning with an eye toward profitability is the surest way to avoid failure.

According to our survey, the top two pieces of advice that founders provided to prevent failure are maintaining a stronger business plan (50%) and more financial backing (47%). Notably, 40% of founders said that pivoting was essential to preventing failure. A critical component of a strong business plan is ensuring that you do extensive research at the outset. Spending significant time on research will help set you up for success over the long term.

In a free-response section where respondents could enter any advice for founders, this theme persisted. Respondents emphasized research, planning, preparation, adaptability, and to keep learning throughout every step of the process.

We encourage founders to look at Wilbur Labs’ Concept Evaluation — our version of a business plan — which you can view in our blueprint for how to turn an idea into a business.

Launching a business is never easy. But do the dominant causes of failure change over time? To find out, we plotted the prevalence of each reason for failure preceding the COVID-19 pandemic from CB Insights and Autopsy data, as business owners today still say they are recovering.

Although the causes of startup failure changed significantly in those six years, challenges with money and financing remained the top reasons for startup failure.

Some causes of failure have grown more prevalent since 2014, including a lack of market need. (That doesn’t mean the world is running out of startup ideas — see How to Get Startup Ideas, another Wilbur Labs blueprint addressing this topic in detail.) Rather, that may reflect a lack of cultural, geographic, and socioeconomic diversity among founders and investors. The sense of increasing competition may suggest that too many founders have piled into red oceans without enough differentiation. Notice that a lack of market need and mistimed products spiked only in 2020. COVID-19 throttled startups that could not shift operations and quickly adapt to the new reality.

Either way, long gone are the days when founders could launch an app or product and users would swarm to try it. There’s too much noise out there. Solving real problems that serve people better is even more critical now, given the sheer number of products competing daily for attention.

Legal challenges have also been on the rise, perhaps due to increasing regulation of digital companies. Before Europe’s General Data Protection Regulation (GDPR) went into effect in 2018, UK small businesses each spent an average of 600 hours to prepare.³ More recently, concerns around data privacy and security, the use of generative AI, and payment processing are also on the rise. Early on in a venture, any distraction from building a product and serving customers can be deadly.

Encouragingly, over the six-year period, fewer founders said their network, scale, team, UX, marketing, or lack of focus were barriers to success over time. Failure to pivot is another barrier in decline. Nearly 30% of startups reported this being a cause for their failure in 2014, but six years later, just under 15% reported the same. Founders willing to pivot tend to raise their odds of success, and this was a consistent piece of advice direct from the founders we surveyed.

In our survey of 150 founders, 40% reported pivoting to avoid failure, and 69% of founders who planned a pivot were confident that it would work.

During a pivot, founders should build the plane as they fly it. The team must learn from mistakes, iterate, and adapt quickly — before the money runs out. Presumably, founders who invest in identifying and mitigating future risks have better odds of not only pivoting but surviving the process.

But which pivots work and why? Which strategies save companies?

58% of founders pivoted by updating or improving their business plan, and when asked what advice they would give to aspiring entrepreneurs, 72% stressed the importance of creating a better business plan from the outset. A bad business plan is detrimental to raising and running out of money, the most frequently reported reason for failure.

Few startups launch with a bulletproof, immutable plan. Rather, successful founders create a plan and improve it continuously as market conditions and customer feedback demand. Changing the business plan can lead to the second and third most popular strategies: improving the existing product or launching a new one.

Almost 22% of founders said they attempted to pivot by securing additional funding or investors. This is a rarer pivot but an important one, given how commonly startups fail by running out of money or by failing to secure more funding. While capital-intensive businesses (e.g., clean industrial technologies) may depend on external financing for longer than average, most startups can avoid this dicey pivot by focusing on their business model and revenue.

The odds are stacked against startups. However, by studying other founders’ mistakes, aspiring entrepreneurs can anticipate and manage preventable failures. With this in mind, Wilbur Labs asked startup founders to indicate the advice they would give to other entrepreneurs.

The leading suggestions are fundamental rules of startup survival: take your business plan seriously, learn from your mistakes, and ensure that there is a market for your product through rigorous testing. Other pieces of noteworthy advice include: being passionate (39%), avoiding burnout (37%), and picking goals that align with your overall vision (32%).

Despite the stereotype, successful founders are not rugged individualists living off Walden Pond. They surround themselves with experts and mentors who have encountered and solved the challenges endemic to building any startup. Founders who learn from these advisors can focus on their own vision rather than on reinventing the wheel.

Although failure is disappointing, 84% of the founders who faced potential failure would be willing to launch another venture.

Having examined why startups fail, how founders pivot, and what they advise in retrospect, what conclusion can we draw for aspiring entrepreneurs?

1. Research, plan, and prepare better. 72% of founders surveyed shared that creating a better business plan would increase their odds of success. That held true before, during, and after the pandemic. “Research, research, research. Research your market,” said one founder. To that, we offer an addendum: turn all that research into a business plan.

2. Do not leave money to chance. Founders often run out of capital, struggle to generate revenue, spend on the wrong things, and/or fail to attract investors. Businesses are well-equipped to solve big problems because they are supposed to be self-sustaining. Revenue from solving problems enables the business to operate long-term without external support. The surest way to avoid financial failure is to develop a business model with a predictable path to revenue and profitability; don’t count on external funding to sustain your business for the long term.

3. Pivots raise the odds of success. 40% of founders pivoted and 69% felt confident about their decision to do so. The best founders are agile and adaptable and use data and feedback to guide their decision-making, pivoting as needed.

4. Learn from shared mistakes. The purpose of this study was to learn from other founders’ mistakes. Coincidentally, the second most popular piece of advice from founders to aspiring entrepreneurs was to learn from mistakes. As one founder advised, “Don't be afraid to make mistakes, but when you do make mistakes, quickly back up and re-evaluate your strategy.”

Although your solution to a problem may blaze new trails, remember that other founders have taken the same journey of launching a startup. All founders share common challenges. By studying past successes and failures, aspiring entrepreneurs can improve their odds of success and avoid missteps that frequently lead to failure. Founders who heed this collective knowledge can reserve their focus for problems unique to their market and product.

Entrepreneurs are made, not born. Hard work, drive, and absolute determination can make up for gaps in skills and experience. The rest is learned by doing, making mistakes, and adapting along the way.

The primary source for this study was a proprietary survey of 150 startup founders. Wilbur Labs administered this survey digitally, utilizing a mix of multiple-choice and open-answer questions. The survey’s main limitation is the reliance on founders self-reporting, which is faced with issues like attribution, exaggeration, telescoping, and recency bias.

This project also utilizes information gathered from CB Insights. To investigate causes of startup failure, our team analyzed CB Insights’ Startup Failure Post-Mortems list and determined the most common reasons that 368 startups ceased to do business, organizing our findings within several overarching categories (e.g., “ran out of cash”).

1. “Survival of Private Sector Establishments by Opening Year.” Business Employment Dynamics | U.S. Bureau of Labor Statistics. Accessed January 25, 2021. https://www.bls.gov/bdm/us_age_naics_00_table7.txt.

2. CB Insights Research. “463 Startup Failure Post-Mortems,” August 1, 2023. https://www.cbinsights.com/research/startup-failure-post-mortem.

3. Perez, Marin. “GDPR Compliance and Small Business.” Microsoft | Business Insights and Ideas, March 18, 2019. https://www.microsoft.com/en-us/microsoft-365/business-insights-ideas/resources/gdpr-compliance-and-small-business.

We hope the information presented in this study will help startup founders develop successful businesses and protect them from the potential pitfalls we’ve discussed. In this spirit, we invite you to share our work with the entrepreneur ecosystem and other readers who might be interested in our results. Please use our findings and graphics exclusively for noncommercial purposes and provide a link back to this page to attribute our team’s MVPs appropriately.