Why Startups Fail: Tips and Strategies for Better Success Rates

Entrepreneurs the world over dream of being in that 1%: launching an ultra-successful startup that achieves unicorn status and brings benefits to customers around the globe. But why is it that, in reality, so few startups survive beyond their infancy, with even fewer making it big? This article delves into the multifaceted reasons why startups in Switzerland, and globally, face such high failure rates. Understanding these challenges is crucial for entrepreneurs aiming to thrive in this dynamic and competitive environment. Additionally, we provide strategic advice and essential insights that can help young startups navigate these hurdles and increase their chances of long-term success.

The challenges of founding a startup in Switzerland

Switzerland, known for its innovation and dynamic corporate landscape, is also a fertile ground for young startups. However, founding a startup here comes with its unique set of challenges in addition to the usual difficulties facing new businesses. High operational costs, intense competition in certain sectors, and a relatively small domestic market can complicate the journey for entrepreneurs. Many startups fail before they ever manage to turn a profit. To avoid becoming just another statistic, startup founders in Switzerland should equip themselves with the knowledge and expertise it takes to succeed, and avoid the common pitfalls that often lead to failure.

The numbers speak: how many startups fail?

Statistics indicate that the startup failure rate is significant across the globe, and Switzerland is no exception. The exact startup failure rate is difficult to pinpoint, as it depends on the criteria used to define “failure”, the timeline over which startups are examined, and the industries looked at. Notable studies tend to agree that more than half of all startups fail in their first five years, and as much as 90% eventually fail in the long run, Here is a summary of some of the most well-known research reports illustrating the high rate of startup failure and the reasons for it:

1. Startup Genome Report: The annual Global Startup Ecosystem Report (GSER) by Startup Genome is one of the most referenced and comprehensive studies on the startup ecosystem. It is based on extensive research and data analysis from 3.5 million startups across 290 global ecosystems. The GSER consistently highlights that, according to their findings, about 90% of startups eventually fail. They often cite premature scaling as a primary reason for this high failure rate.
2. CB Insights: CB Insights regularly analyzes why startups fail by examining post-mortems of failed startups. Their research indicates that insufficient cash or a failure to raise new capital is the top reason, responsible for about 38% of failures.
3. Harvard Business School Study by Shikhar Ghosh: This study suggests that the failure rate of venture-backed startups is higher than most commonly believe, with about 75% of these startups failing to ever see a return on invested capital. The study further breaks down the modes of failure, providing detailed insight into the challenges startups face.
4. Failory’s Startup Failure Rate Statistics: Failory compiles and updates data on startup failure rates and reasons from various recognized sources. Their findings corroborate with the common statistic that approximately 90% of startups eventually fail, with a substantial portion failing within the first few years of operation.

The top 12 reasons why so many startups fail

There are a multitude of reasons why many startups don’t make it. We’ve compiled and consolidated them into what we see as the 12 key causes of startup failure:

1. Lack of demand

Many startups fail because they do not adequately address a market need. Their products or services might be innovative but not essential or too ahead of their time, meaning that there is little to no demand. Without conducting proper research and determining whether there is a significant and viable target audience for your product, it could fall flat regardless of how inherently good it might be.

2. Financial challenges

One of the biggest difficulties that startups often encounter is cash flow problems due to inadequate financial planning. Securing sufficient financing and managing cash flow effectively is crucial for survival, especially in the early stages. This requires having realistic expectations, financial buffers, and putting in the time and energy needed to attract loyal investors with deep pockets.

3. Issues with the founding team

In most cases, the success of a startup comes down to having the right founding team who can execute the business model properly. Investors know this and place great importance on the composition and skillsets of the founding team. An inadequate team that lacks experience, or suffers from internal conflicts, can cripple a startup. The importance of a harmonious team that covers a range of skills cannot be overstated.

4. Competitive pressures

Failing to adequately assess and respond to competition can lead to failure, especially if the market is saturated. When a startup enters the market, they come up against established companies with their own recognized brand and existing customer base. To stand a chance, the startup needs to be able to differentiate itself from its competitors and develop a clear unique selling point (USP) to quickly gain traction and market share. Startups who fail to do this can easily be overshadowed and outperformed in such a competitive landscape.

5. Poor or mistimed product

At the end of the day, customers appreciate quality above all else. If a product is subpar or fails to deliver on its promise, customers will turn away, often leading to the startup’s downfall.

In some cases, the product itself may be a good one, but its launch is poorly timed. An example would be if you develop a product in expectation of a growing trend or new hype, but you don’t manage to launch it in time to meet the new demand due to production delays or other setbacks. By the time your product is ready, competitors have launched similar products and the market is already saturated.

Another example of mistimed products is launching innovative ideas ahead of their time. For example, brand new technologies which do not have adequate support from the surrounding infrastructure and have not yet entered the minds of consumers as a legitimate need. A classic example is the Apple Newton, which was launched in 1993 as one of the first attempts at creating a personal digital assistant (PDA), but the technology was ahead of its time, and the computing power was not yet good enough for the Newton to perform adequately.

6. Flawed business model

Inexperienced startups often lack clear and effective strategies. Creating a successful business involves numerous puzzle pieces, and if they don’t all fit together into a well-thought-out business model and plan, the startup will ultimately fail to make a lasting impact.

One of the most common flaws in the business model is a poor pricing model. Positioning the product with the right price is challenging, but paramount to success. If the price is too low it can reduce its perceived value and result in unsustainable operations, while a price too high can end up turning away customers and not gaining any traction in a competitive market.

Other common business model flaws include:

• Unclear value proposition.
• Unsustainable or unscalable revenue streams.
• Flawed cost structures, for example costs that are too high relative to expected revenue.
• Misidentifying or miscalculating the appropriate target market and its size.
• Not including a solid plan for building and maintaining customer relationships.
• Inadequate or ineffective distribution channels.
• Not considering scalability from the outset.
• Over-reliance on specific partnerships or external agencies.
• Ignoring or misunderstanding regulatory requirements.
• Failing to properly protect intellectual property.

Startups need to be flexible and willing to pivot their business model based on market feedback and changing circumstances if it becomes clear that it’s leading them to failure.

7. Regulatory challenges

Legal and regulatory challenges, such as failing to comply with relevant laws and regulations, intellectual property disputes, or other legal conflicts, are a major cause of startup failure. Non-compliance with regulations can incur penalties, or even worse, force a startup to cease its operations entirely.

As such, startups need to understand the importance of staying on top of legal matters from the outset. They should hire legal experts to help them choose an appropriate legal form, comply with tax regulations, obtain any necessary permits and licenses, avoid IP infringements while protecting their own IP, and adhere to data protection regulations.

8. Unsuccessful marketing and branding

Marketing and branding are the backbone of the most successful companies. Ineffective marketing strategies and poor branding or naming can prevent a startup from gaining the traction it needs to survive.

Even the best products won’t sell if you don’t have the right marketing approach to communicate the existence and benefits of your product to your target customers. A clear, appealing brand that resonates with customers is also crucial. Something as seemingly simple as the name of your company can, in many cases, be the decisive factor between success and failure. Customers should clearly associate your name and brand with the product and value you bring to them.

9. Scaling too fast or slow

Misjudging the pace at which to scale operations can be detrimental. Many startups are overly eager to begin scaling their operations, but lack the resources, expertise, and operating capacity to do so. Premature scaling is even cited as the number one reason for startup failure according to Startup Genome. The opposite side of the coin is a failure to scale your operations when it’s time to do so. Scaling too slowly can lead to missed opportunities and an inability to break even and turn significant profits.

10. External factors

While failure can very often be averted with the right foundations and strategies, sometimes there are external factors beyond the control of the founders which ultimately lead to an untimely fall of the company. Economic downturns, intense competition, changing consumer preferences, new technological innovations causing obsolescence, or just plain bad luck can all be causes of the failure of a startup. The most successful startups are those with the adaptability and resilience to weather such unanticipated storms by responding rapidly to an ever-changing market.

11. Lack of advisory support and inattention to customer feedback

Failing to seek advice from mentors, advisors, or industry experts can isolate a startup from valuable insights and guidance. This is especially important for first-time and inexperienced founders. Customers themselves are often the most valuable source of feedback that can positively contribute to the improvement and ongoing development of products and services. Ignoring the feedback of customers is therefore a major cause of failure. Not only does the company miss out on valuable information to help improve and optimize their products, but they risk losing customer loyalty and, in the worst cases, angering and disappointing customers who feel ignored.

12. Unrealistic expectations

We’ve all heard the fairytale stories of startups that go on to be a huge success. It’s difficult for new founders to not have these kinds of aspirations in mind, and there is certainly nothing wrong with dreaming big! That said, it’s important for founders to have realistic expectations, which can help them plan effectively for setbacks, implement proper risk management, and stay grounded and focused on getting the basics right. Remember, only about 1% of startups manage to achieve “unicorn” status (i.e., they reach a valuation of $1 billion or more), so the wild success stories like that of Uber, Airbnb, Stripe, etc. are few and far between.

Avoid the same mistakes: tips for building a successful startup

Building a successful startup is no walk in the park, but you can maximize your chances by following these simple tips:

1. Validate market demand: Conduct thorough market research to ensure there is a real need for your product or service. Use customer feedback to refine your offering.
2. Focus on financial health: Develop a solid financial plan, manage cash flow carefully, and ensure you have sufficient funding to sustain operations.
3. Build a strong team: Assemble a team that brings diverse skills and a shared commitment to your vision. The right team can work harmoniously to navigate challenges more effectively.
4. Set yourself apart with a unique selling point: Clearly define what makes your startup different and better than competitors to capture market attention and loyalty.
5. Adapt and pivot when necessary: Stay flexible and be willing to adjust your business model in response to customer feedback, market changes, or new opportunities.
6. Implement scalable processes: Design your business processes to handle growth, and carefully consider the appropriate pace at which to scale your production. Scalable systems prevent operational bottlenecks as you expand.
7. Engage with customers: Build close relationships with your customers and treat them as your number one priority. Their feedback is invaluable for improvement and adaptation, and their loyalty is vital for your ongoing success.
8. Leverage expert advice: Seek guidance from mentors, advisors, and industry experts. Their experience can provide crucial insights and help you avoid common mistakes.
9. Continuously evaluate and improve: Regularly review your business strategy, market position, and operational efficiency. Continuous improvement is key to long-term success.
10. Plan for challenges: Prepare for unexpected challenges and external forces with contingency plans. Anticipating potential issues can help you respond quickly and effectively.