Startup Failure 10 Years ago Vs. Now
In the last ten years, there have been profound changes in how business is conducted globally. The emergence of digital and social media marketing, increased app and mobile adoption, and the explosion of tech innovation are at the forefront of driving business growth and are just a few key transformations that have changed the landscape for companies old and, most importantly, new. Startups have had to incorporate these new practices into their business models or risk failing to remain up-to-date with the ever-evolving market. And such vast change brings a whole host of new causes for startup failure, now more in line with today's market climate. Despite a nine-year gap between the two periods, 2022 and 2013, startup failure statistics remain identical. According to data collated during both periods, 90% of startups fail within five years of starting (Failory, 2022). This is an intriguing observation considering how the venture space has grown exponentially over the period, climbing at a CAGR of 22% between 2013-2022 from $79BN to a much more impressive $483BN (MarketWatch, 2023). This data suggests VCs are investing greater amounts of capital but are still meticulous in selecting the startups that receive funding rather than increasing the number of investments they make. The US has easily remained the most active region for venture investments, with a 48% share ($234.5BN) of global invested capital (PitchBook, 2023). And unsurprisingly, the US also hosts the greatest volume of startup companies (and the greatest number of startup failures). So let's explore the primary reasons for startup failure, including those most commonly cited by former founders for 2020-2023 compared with ten years ago.
By scouring the grave tales of failed startup founders collated by the CB Insights post-mortem webpage (CB Insights, 2023), it is evident how the causes for failure have heavily evolved. Starting with the pre-2014 reasons for startup failure, of the 45 detailed startups, the primary cause for failure, with a 47% share, was an inability to scale the company to capture a large enough customer base, heavily caused by a lack of market demand. Coming in second was either poor product and product development relative to the competition, with a 22% share. The less prominent causes included an inability to monetise product lines, overly aggressive expansion, and an inability to raise capital with a 17%, 7%, and 7% share, respectively. The overarching theme of these causes for failure are the micro-inefficiencies of the startups, where the inability to successfully develop the various elements of the business (products, revenue streams, funding etc.) in one way or another causes the startup to dissolve. The famous Paul Graham, founder of legendary startup accelerator Y Combinator, in 2006 identified eighteen key mistakes that kill startups, with a heavy focus placed on the micro-decisions made by founders that simply fail to grow the company (Graham, 2006). These include the likes of poor recruitment, excessive spending, internal disagreement amongst leadership, and launching too early. There is minimal influence placed on macro factors, which is highly indicative of how little the economy and macro environment dominated the startup landscape when compared with the current environment. With more suitable decision-making by founders, micro-inefficiencies could be solved with better judgement and decision-making, thus startup failure during this period was largely self-inflicted, with internal issues at the forefront.
Whereas the data concerning startup failure between the more recent period of 2020-2023 portrays a different narrative. Of the 116 deceased startups, 40% cited 'unfavourable' or 'poor' market conditions as their downfall. The next most prominent proponent of failure was an inability to secure additional capital from investors, standing at 28%, followed by 15% operating under an unsustainable business model. Less principal reasons included a lack of product development, fraudulent activity, and internal disagreement between founders, all clocking in at the below 5% level. The data highlights how macro-influences surrounding market conditions and the VC investment landscape greatly influence startup success (or failure). In 2013, global inflation peaked at 2.62% compared to the 8.8% documented in 2022 (Barklie, 2022), along with a US interest rate of 4.75% that is driving capital investment out of equities (including venture) and instead into 'safer' asset classes such as bonds and commodities (Mettis Global, 2023). Consumer spending continues to fall as the average consumer's confidence wanes in the face of a looming recession and little positive economic sentiment (GFK, 2022). Supply-chain and inventory issues persist from the pandemic eating margins and boosting production costs, which refuse to go away. Businesses are now looking to curb the intense expansion period that fuelled growth during the past two years by cutting workforces and reducing investment to improve margins, to the detriment of small tech companies hoping to ride on the resources of major tech titans.
Overall, the founders of the startup post-mortem page certainly didn't lie when reflecting on the market they have had to play with in the last twelve months, a far cry from the stability offered ten years ago, where external influences played a far lesser impact on startup success.
Reference List -
Barklie, G. (2022) Which countries have the highest level of inflation?, Investment Monitor. Available at: https://www.investmentmonitor.ai/insights/which-countries-have-the-highest-level-of-inflation/ (Accessed: March 6, 2023).
CB Insights (2023) 442 startup failure post-mortems, CB Insights Research. CB Insights. Available at: https://www.cbinsights.com/research/startup-failure-post-mortem/ (Accessed: March 6, 2023).
Failory (2022) Startup failure rate: How many startups fail and why in 2023?, RSS. Failory. Available at: https://www.failory.com/blog/startup-failure-rate (Accessed: March 6, 2023).
GFK (2022) UK consumer confidence down two points to lowest-ever score of -40, Consumer confidence down two points to lowest-ever score of -40 . GFK. Available at: https://www.gfk.com/press/uk-consumer-confidence-down-two-points-to-lowest-ever-score-of-40 (Accessed: March 6, 2023).
Graham, P. (2006) The 18 mistakes that kill startups, The 18 mistakes that Kill Startups. Available at: http://www.paulgraham.com/startupmistakes.html (Accessed: March 6, 2023).
MarketWatch (2023) Venture Capital Market Size, share and forecast 2028 with top countries data, Venture Capital Market Size, Share and Forecast 2028 with Top Countries Data. MarketWatch. Available at: https://www.marketwatch.com/press-release/venture-capital-market-size-share-and-forecast-2028-with-top-countries-data-2023-02-20 (Accessed: March 6, 2023).
Mettis Global (2023) US fed increases interest rate by 25 BPS to 4.75%, Mettis Global Link. Available at: https://mettisglobal.news/us-fed-increases-interest-rate-by-25-bps-to-4-75/ (Accessed: March 6, 2023).
PitchBook (2023) Venture Capital Database, PitchBook. Available at: https://pitchbook.com/venture-capital-database?utm_source=google&utm_medium=cpc&utm_campaign=Investor-Data-EU&adgroup=Investor-Data-VC-Firms&utm_term=us+venture+capital+firms&device=c&utm_content=&_bk=us+venture+capital+firms&_bt=506557418152&_bm=b&_bn=g&_bg=123104663487&kwdaud=kwd-2698714170&sfid=8P52lP5e-dc_pcrid_506557418152_pkw_us+venture+capital+firms_pmt_b_slid__productid__pgrid_123104663487_ptaid_kwd-2698714170&gclid=CjwKCAiAu5agBhBzEiwAdiR5tKnVIeK6HMjhwD5PycqpRH-5GpqU0eoGE9vIUHbvraYgLlBtlb4SBxoCBdQQAvD_BwE (Accessed: March 6, 2023).