Why Startups Fail? A Data Analysis by Autopsy
This is a partnership piece with Forward Partners, original articled posted here:
Getting to Series A: The odds and how we help founders beat them
Below is a more in-depth analysis for our readers:
Most commonly asked question we receive is what are the top reasons why startups fail. So we did an analysis on over 300 failed tech startups on our database, here’s what we found.
But first, what is Autopsy?
Autopsy, a startup based in London, gathers data and lessons from failed startups. It has the largest database on startup failure globally ranging from tech startups predominantly within Pre-seed to Series A stages. The website launched in 2015 where it received over 100,000 page views upon its first four days of launch, became number one on Product Hunt and HackerNews, was mentioned by Marc Andreessen on Twitter as the ‘catalog of future successful startups’ alongside being featured in multiple popular publications such as Bloomberg, The Next Web, Wall Street Journal and Business Insider.
Within three years, 92% of startups fail (source: Startup Genome). Autopsy continues to capture and analyse failure data to provide an insight into the reasons why companies fail and what key data and lessons derived from their failure can be useful for future startups and other stakeholders in the space such as Venture Capitalists.
Data analysis on 300 failed tech startups:
Autopsy ran an analysis on 300 failed startups to understand what are the common reasons for failure. After a deep dive of reading and analysis into each submitted story on Autopsy, we’ve gathered the top 10 reasons for failure. For the sake of this article, we will be focusing on the top 5 reasons for failure with relevant examples from our Autopsy submissions.
Top 10 reasons for failure based on 300 failed startups via Autopsy
#1 Not The Right Team:
Up to 20% of autopsies stressed the reason for their failure was due to having a poor team/not the right team. Having a diverse team with the relevant skills is of utmost importance as stated by majority of founders of failed startups. CEO and Co-founder of Standout Jobs a B2B recruiting portal, Ben Yoskovitz, which went on to raise a Series A round of $1.8m, and closed after three years in existence. Stated in his autopsy ‘we raised too much money too early with the wrong team. Our founding team couldn’t build an MVP on its own’ he continued on to say ‘if the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t.’
On the flip side, Founder of venture backed failed mobile app startup Sonar, Brett Martin, claimed he had a strong team with the relevant skills and heightened the importance of a culture that would enforce a good and harmonised team. In his post-mortem he stresses that a startup working culture mirrors that of its founder ‘maybe the best thing that you can do is work hard to get clear on who you are. Write that down and share it with your team. If you’ve been honest, every action you take will reinforce your values.’
#2 Wrong Business Model:
Building a product without a clear business model was the case for 18.7% of failed startups. The core purpose of a business model which outlines exactly how the company is to make money through which revenue channels and a pricing model to compliment the business and it’s customers tends to be a challenge faced by most startups. Cart, a US based startup that tried to create a model through which grocery stores can buy into a programme that reduces transportation barriers to their stores, realised early on that they were faced with a business that had an unsustainable business model.
‘We were able to test 8 key hypothesis to see if our technology, the market segmentation, and economic model could become a sustainable business which could improve long-term food access for Detroiters. After analysing the pilot data, talking to a variety of stakeholders about our findings, and ongoing customer discovery, we came to the conclusion that our current model is not economically viable. We contemplated a series of pivots, but have come to the conclusion that these are also not economically viable.’
Some cases of startups having had a clear business model but with one revenue channel proved to also be categorised under the poor business model failure category as this inability to explore multiple revenue channels seems unscalable to investors thus affected some startups follow on funding.
#3 Product Not a Hit:
Nearly 14% of autopsies claimed the implementation of a poor product was the cause of failure.
Through our analysis, we discovered London based startup, Karhoo, a taxi comparison app which closed 6 months after launch despite reportedly raising $250m. Karhoo lost a significant amount of money due to having a very poor product.
Considering how capital intensive the transport services industry is, the company was looking for more investors and executed a campaign to entice people to use the service and show potential investors that the app was indeed widely used. As a promotional tool, they offered free rides to passengers. The problem was that app codes never seemed to expire and people would use £100 worth in free rides. There were also bugs within the app that sometimes prevented the app from accepting credit cards payments.
According to some staff members, they stated that they should have seen the warning signs earlier- “When you look back, there were chinks in the armour. Thousands of pounds worth of promotional codes given to customers every week is lunacy. There was a lot of vanity here.”
Despite their reported amount of funding, Karhoo faced poor product execution and the app only had 50,000–100,000 downloads and was ranked number 86 in transport apps in the UK.
#4 No market Need:
Another common case for failure is no market need which equates to 11% of autopsies. Startup founders which expressed this as the cause of failure, admittedly stated that they fail if they are not tackling a problem that serves a large enough market need.
Moped, a Berlin based free messaging app startup claimed it was going after the ‘sweet spot’ of sharing files over messaging. After having raised $1m and continuous efforts to target more users, it failed to attract a large enough of pool of users and lost a high number of its initial user base. The app’s popularity and the number of users saw a steady decrease over the startup’s lifetime. The inability to achieve user retention and customer acquisition led to inefficiency in the product and detracting further investment from investors. The Moped app was shut down on December 31st 2013 and its messaging app technology was acquired by Berlin-based company 6Wunderkinder, founders of Wunderlist.
The app was claimed to be somewhat ahead of its time solving a problem that served a very small proportion of users.
#5 Outcompeted:
9.13% of failures on Autopsy stated the emergence of competition being the main cause of death. Throughout our analysis of submitted autopsies, we came across multiple on-demand food delivery companies which predominantly launched in 2013 and closed in 2016. The year 2016, being at the height of failure for most on-demand food delivery companies saw the failure of Take Eat Easy. An on-demand food delivery service covering Belgium, UK and France, had closed €16.4m in its last Series B round claimed it faltered under fierce competition from the likes of Deliveroo and Ubereats as the cause of its death in July 2016.
Burning through its Series B round quickly, Take Eat Easy searched for Series C investors. However, due to the competitive market, the company failed to find investors after being turned down by 114 VCs. ‘We haven’t been able to raise additional capital to fuel the company until break-even,’ wrote Take Eat Easy CEO and cofounder Adrien Roose . “We’ve started working on our Series C in October 2015. We knew we had to gear up as one of our own investors [Rocket Internet] acquired and invested aggressively in a direct competitor, now Foodora, and Deliveroo had just raised a massive round of funding. Unfortunately for us, they raised and announced an even bigger round a couple of weeks later. That didn’t help.”
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