Why Do Startups Fail? An Analysis of 3,200 High-growth Technology Startups

By June 18, 2012

While you wouldn’t know it from their enthusiasm, ambition, drive, and all-around excitement, every founder deals with a hard truth: According to statistics, their startup has an eight percent chance of success. From the amount of investments and aqusitions announced every day, it is easily forgotten that 11 out of 12 startups fail. But why?

That’s the question that The Startup Genome project, an on-going R&D initiative to understand what makes startups tick, set out to answer last year.  After looking at  3,200 high-growth technology startups, it found that most startups failed mostly due to self destruction. In its report, it found that premature scaling is the most common reason for startups to perform worse, causing them “to lose the battle early on by getting ahead of themselves.”

Seventy percent of startups scaled prematurely along some dimension (customers, product,team, business model, or funding). It goes on to note that, “While this number seemed high, this may go a long way towards  explaining the 90% failure rate of startups.” The Startup Genome Team accessed each startups scaling using trained machine learning algorithms to assess both the behavioral and actual stage of a startup. If the two metrics were not identical, this indictaed that the company scaled some dimension prematurely.

Examples for scaling prematurely from the study include:

– Spending too much on customer acquisition before product/market fit and a repeatable scalable business model.
– Investing into scalability of the product before product/market fit.
– Adding “nice to have” features.
– Hiring too many people too early.
– Raising too little money.
– Raising too much money. (The study notes that this isn’t necessarily bad, but found that usually it makes entrepreneurs undisciplined and gives them the freedom to prematurely scale other dimensions.)
– Focusing too much on profit maximization too early.
– Over-planning, executing without regular feedback loop.
– Not adapting business model to a changing market.

So how big of a problem is premature scaling? The Startup Genome Project found that 74 percent of high-growth internet startups fail due to premature scaling and 93 percent of startups that scale prematurely never break the $100k revenue per month threshold.