Startups July 30, 2020

What percentage of startups fail?

Nico Cerdeira @nicocerdeira

A lot of IHers have shared in this community their projects and personal failure stories. While there is a lot of positivity and enthusiasm across IH, in the end, most projects won’t do it and that’s not something entrepreneurs should fear/feel ashamed of.

Failure in businesses/startups has become a more present topic in social networks and communities of entrepreneurs, with people being more open to sharing their mistakes.

The well-known @levelsio has tweeted about failure a few times; Udemy’s co-founder @gaganbiyani has recently made a viral Twitter thread sharing the behind scenes of his food startup Sprig; and Baremtrics’ founder @Shpigford has even created a massive Gsheet showing all of his 59 projects, most of which (+60%) had shut down.

All this has motivated us on Failory to carry out a research to find out the actual percentage of startups that fail. I thought some of you could find it useful ;)

Failure of new businesses

The best source around the failure of businesses (not startups, more on that below) comes from the Bureau of Labor:

20% failure rate until the end of the 1st year
30% failure rate until the end of the 2nd year
50% failure rate until the end of the 5th year
70% failure rate until the end of the 10th year

Failure of startups

Not all businesses are startups. For this research, we considered startups those businesses which had these two characteristics:

  • Innovative: Startups test technologies, products, services, and markets that haven’t been tested before.
  • Growth-driven: Startups aim to grow exponentially, not linearly.

A design agency is a business. You’ll probably be delivering similar services other design agencies do and, if you want to grow, you’ll have to hire more staff which will increase your costs at a similar rate your expenses will.

If you build a design-related SaaS, instead, you’ll probably be solving an issue in a new way and you won’t need to increase costs (actually yes, but not in the same proportion) to gain new clients and increase your revenues.

You can’t expect a 20% failure rate in you’re first year if you’re trying something completely new.

The regularly quoted number, whose source is the Startup Genome project, is that 9 out of 10 startups fail.

Failure of “scale-ups”

With “scale-ups” we refer to those startups in the growth-stage. These have already gone through the early stages, so they have generally validated their businesses and have found their product-market fit.

It’s reasonable to think, then, that their failure rates will be much lower. Harvard Business School lecturer Shikhar Ghosh, on this article on WSJ, shares that 75% of venture-backed startups (which are 0.05% of all the startups) never return cash to investors.

When we investigated on YCombinator, we found out a shocking lower failure rate: 20%. Over the last 15 years, they have invested in more than 2200 companies and it seems like only 400 are officially inactive.

Would love to hear your thoughts on these numbers and talk further about startup failure down in the comments.

If you want to read the full research, you can find it here. It also includes some investigation on the industries with higher failure rates, the most common causes of failure (spoiler: lack of product-market fit is the main one), and the implications these rates have on entrepreneurs & investors.

  1. 3

    Does it even matter? Nowadays the word "startup" doesn't mean anything because it's been overused and word failure as well.

    If I call 300 clients, interview them with the right sales script, find 5 of them who will pay $1000 for Facebook Ads management - is that a startup? Is that a success?

    If I just create a spontaneous but solid sounding idea from my head, try to force people to use it, get 100 users who will say "omg, so good!", and nobody will pay - is that a startup? Is it a failure?

    How many people create idea first without talking with people? Can we call it a failure or is it just a "bad sales process"?

    I recommend not listening to opinions that market is full of and perform sales analysis from projects that worked. Failures don't mean much if you can't find the exact processes people used.

    1. 1

      Thanks for replying man!

      While you have a point when saying that the words "startup" and "failure" have been over-used, this is no more than research in which we understood as "startup" one specific thing that's described above, and for "failure" the shut down of a business. In that way, we were able to analyze the rates and find common patterns.

      On the side, I disagree with that final quote that "Failures don't mean much if you can't find the exact processes people used".

      By learning what not to do, you'll have a more limited scope of strategies and actions you can and can't try. Seeing what worked for other people may 1) not work for you; 2) mean you'll be doing the same as your competitors.

      While replicating success processes can be a winning strategy on some occasions, that's not necessarily always the case. Instead, learning the common reasons for failure such as "no quick validation of ideas" and avoiding them at your startup will probably prevent you from quickly shutting down-

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