It’s a common adage in Silicon Valley that 90% of startups ultimately fail. To understand why that’s the case, a pair of researchers meticulously pored over 193 blog posts—startup postmortems, if you will—written by founders examining what went wrong.
It was a heartwrenching experience for Kerry Jones, an employee at data-marketing firm Fractl, to be involved in the project. “It’s extremely emotional, and I think it’s really obvious how much of their lives most people sink into their companies,” she says. (Here’s one sample from Zirtual founder Maren Kate: “I cry for all the employees we hurt. I cry for all the clients we infuriated. And I cry for the investors we let down.”)
There are, of course, limitations to this data set. For starters, there are fewer than 200 posts in it, and they all were written by founders willing to share their stories—or the portions of their stories that they were willing to reveal, anyway. “There isn’t some outside entity that went in and evaluated this company,” Jones notes. “That’s something important to keep in mind.”
But taken as a whole, the insights from the research project are intriguing. For the failed startups analyzed in this study, the factor most often cited by founders, even more often than running out of cash, was that their business models weren’t viable.
The data gleaned from the posts, ranging in date from early 2000s to today, reveal more nuanced reasons depending on the type of startup, funding status, and amount of money raised.
Category killers
A few major themes surface when zeroing in by sector. Overall, fashion companies most often cited money problems (running out of cash or not being able to secure funding) for their failures. Social media companies struggled with gaining traction and creating a viable business model. Software company founders concluded their problems stemmed from focusing too much on the technical aspects of their products and ignoring what customers actually wanted.
Funded vs. bootstrapped
When examining startups’ funding status, another interesting pattern emerged. “I started to notice, as I was going through the data I collected, that funded startups were the ones who were running out of money,” Jones says. Indeed, that was the most common reason (28% of 147 funded startups) cited by founders who raised money for their startups.
Yet among bootstrapped startups, running out of money was fairly low on the list, coming in as the 10th-most common reason. Only four of 40 unfunded startups blamed it as one of the causes for their businesses going under. For them, the most cited cause of failure was their business model (25%), which could partly explain why some of these companies couldn’t obtain funding in the first place. (A fifth of the unfunded startups said their woes had to do with their inability to secure financing.)
Bootstrapped companies were also more likely to cite inexperience or a skills gap (not having engineers with the right expertise, for example) as a reason for failure, compared to their funded counterparts (15% vs. 3%).
Amount raised
A surprising takeaway is that startups with large amounts of funding were outcompeted. This was not a problem cited by bootstrapped startups or companies that raised less than $1 million, but it was prevalent among those that raised $10 million or more. Of the 77 companies that raised at least eight figures, 19% said they couldn’t compete despite their sizable war chests. Such was the case with Gowalla, a Foursquare competitor that raised $10.4 million before throwing in the towel.
Gender
While these blog posts don’t make a representative sample, Jones highlights the fact that only 18 of the startups that were part of her analysis had at least one female founder. Perhaps that’s telling, she suggests, pointing to data from venture capital firm First Round that showed companies with at least one female founder outperformed startups with all-male founders. It also could just reflect the fact that there are comparatively few female founders in the startup world.
Hindsight is 20/20
Some of the blog posts from the founders were written immediately upon the demise of their startups; some were written years after the fact. Either way, there was one common theme across many of them: Hindsight is 20/20.
“In a lot of cases, they weren’t able to pinpoint what went wrong until everything’s said and done,” Jones says. “I think founders tend to have a lot of wisdom after the fact. To me, that’s the real value of people putting this information out there. It helps founders of current startups be a little more self-aware of what they should be looking for.”
The image at the top of this post was taken by Ryan Steele and shared under the Creative Commons license on Flickr.