The top 4 reasons why startups fail and how you can avoid them

Miguel Fernandez
Miguel Fernandez
Co-founder & CEO
Posted on
August 22, 2023
min read
The top 4 reasons why startups fail and how you can avoid them

There are a lot of scary statistics floating around about the high failure rate of startups—we’ve all heard the classic “90% of startups fail” line, but other reported rates range from 63% for tech startups to 95% for startups in general, and even as high as 99% for all entrepreneurs or small businesses. While no one knows the exact number of startups that fail, the consensus is that the failure rate is relatively high—which isn’t good news for an aspiring founder.

So, what can you do to ensure your startup is one of the few that finds success?

While there are infinite reasons a business could fail, some patterns emerge again and again, especially when looking at startups in the tech space. These patterns appear through professional studies and surveys, the anecdotal experience of venture capitalists and other players in the ecosystem, and even our customer data

Keep reading to learn the top 4 reasons why startups fail, the warning signs your startup is in danger of failing for a particular reason, and what steps you can take to prevent failure. 

Why most startups fail in the SaaS industry

According to a survey done by Skynova, the top reasons for startup failure in 2022 included lacking investor interest, running out of money, the Covid-19 pandemic, poor timing, and disharmony amongst the team and/or a startup’s investors.

Most of these reasons are closely related to the reasons for low performance we’ve observed through tracking the financial data of startups we fund. They’re also similar to the reasons many others in the industry have noticed, such as Tom Eisenmann, author of Why Startups Fail, who notes that things like “bad bedfellows” and “speed traps” are some of the biggest obstacles startups face.

In general, across all sources, a lack of money and conflicting interests between key stakeholders are some of the biggest reasons for startup failure, as well as internal mismanagement and a mismatch between what you’re offering and what the market wants.

We’ve condensed these common themes into the 4  top reasons why startups fail in the SaaS industry. Here’s how they break down. 

The top 4 reasons startups fail include: Lack of financing or investors, running out of cash, lack of market demand or poor timing, and people problems.

Reason 1: Lack of financing or investors

According to Skynova, in 2022, 47% of failed startups listed a lack of financing or investors as a leading cause of their downfall. The struggle to secure necessary funds can spell the end for even the most promising companies, and this problem is likely to get even more prominent in 2023 as the market continues to cool off. 

Reasons that startups fail to get financing or investors can vary, but generally include:

  • Inability to qualify for financing. A lack of established credit history, insufficient collateral, or a high-risk perception from financial institutions and investors can prevent a startup from accessing funding. 
  • Lack of available financing options. Sometimes even if you check all the boxes, you can still fail to secure financing because there’s simply not enough financing to go around. This is especially true in the current environment where zombie VCs, or venture capital firms that stay in business but quietly stop taking on new investments, plague the startup financing landscape. 
  • Failure to attract investors. Securing investor interest is a formidable challenge in any economic environment. Anything from an unproven track record, market saturation, real or perceived lack of demand for your product, or subpar pitching skills can undermine a startup's ability to attract investors. 

Warning signs of losing financing opportunities

Recognizing the early signs of financial instability is essential for understanding if you’re in danger of failing to secure your next investment round. 

Cash flow problems that prevent you from covering your ongoing expenses, missed payment obligations, and missed revenue targets are all red flags for your business’s financial health. Bad financial health can, in turn, prevent you from securing your next round of funding, as venture capitalists and debt lenders alike don’t like to see weak financials. 

Analyzing your overall business performance is also important. If your business goals, product development goals, marketing iniatives, and team communications are becoming confusing or uncertain, this won’t go over well in your next pitch meeting. Investors want to see a clear vision, a clear pathway to success, and evidence that you can follow through.

Non-dilutive financing as a solution

If you’re in a pinch and need some extra cash to fund an initiative, address an ongoing expense, or plug a temporary cash flow gap, it may be time to try non-dilutive financing options like revenue-based financing.

Revenue-based financing requires no collateral, doesn’t dilute equity, is widely available, and is easy to secure in as little as a few days. Try this runway calculator to learn how much you can extend your runway using revenue-based financing.

Reason 2: Running out of cash

The second most popular reason for startup failure, according to Skynova, was running out of cash, with a staggering 44% of startups reporting this as a core reason for their failure. 

Running out of cash usually occurs due to a combination of reasons. Some of the most common ones include:  

  • Poor financial planning. A failure to accurately forecast your financial requirements can quickly erode cash reserves and leave a startup on the brink of insolvency. Underestimating expenses, failing to create an adequate emergency reserve, bad investments, and overestimating revenue are all common factors that can lead to believing you have more runway than you do. 
  • Excessive spending. Many startup founders spend more than they need to because they want to make their company seem successful and keep up with investor pressure to grow quickly. Expensive offices, over-the-top employee perks, rapid acquisition of employees, and growth costs that outpace revenue are all spending traps founders need to watch out for. 
  • Failing to secure financing in time. Failing to get funding in time to replenish your cash reserves or failing to get as much funding as you hoped are common reasons for running out of cash.
  • Delays in revenue generation. Sluggish or deferred revenue inflows can compound cash flow woes, causing startups to struggle with meeting their financial obligations.

Warning signs of an impending cash flow crisis

The earlier you spot a cash flow problem, the easier it is to fix it. Increasing debt, a struggle to meet regular operating expenses, and spending more money than you expect to each month are all red flags that your startup is depleting its cash reserves faster than it should be. 

You should also ensure you’re not spending based on unrealistic growth targets. If you’re hiring quickly with the expectation that you’ll make $5M in ARR next year, but your current ARR has hovered around $250K for 6 months, it might be time to realign your expectations and adjust your spending practices accordingly.

Solutions: Adjust your spending and bring in more revenue

The best way to solve cash flow problems is to maintain a realistic budget. You can accomplish this by analyzing your expenses and cutting unnecessary or exaggerated costs. For ideas of what kind of costs to cut, check out this article about scaling a startup on a budget.

Increasing revenue is another way to solve cash flow problems. Consider expanding to new audiences, increasing the value of your existing customers, or changing your pricing strategy. For example, implementing flexible payments with B2B BNPL can help you accelerate sales velocity by 300% and increase ACV (average contract value) by 18%. 

Reason 3: Lack of market demand or poor timing

Lack of market demand and poor timing is another popular reason why startups fail. While, to some degree, timing the market is a matter of luck, in many cases, the essential problem is that founders prioritize the “what” before the “why.” 

Instead of seeing a problem in the market and creating a product to solve it, a founder creates a product first, then works backward to come up with a problem it solves. In many cases, the problem doesn’t exist, and the founder is stuck with a product with limited real-world demand. 

Here are some additional factors that exacerbate this problem and lead to a lack of product demand.

  • Inadequate market research. Rushing headlong into product development without a comprehensive understanding of the target audience, what your competitors are doing, and the norms surrounding pricing and marketing can lead to products or services that are low performers at best and completely unneeded at worst. 
  • Misalignment with customer needs. When a startup fails to address genuine problems or fulfill customer needs, there will be a lack of interest in your product. The marketplace is also constantly changing, which means startups must stay open to adapting their offerings to fit the evolving needs of their customers. 
  • Not taking market trends into account. Sometimes, even when your product is useful or even groundbreaking, the world isn’t ready to embrace it yet due to trends that prioritize other solutions or promote a lack of understanding of the problem you’re solving. Other times, your product gets overshadowed by a competitor that produced a similar product a few months earlier. Striking the right balance requires luck and thorough research to identify the opportune moment for a product launch.

Warning signs of a lack of product demand

Several warning signs can point to a lack of market demand—stagnant growth, where a startup's customer base remains stagnant or shrinks, is a telling signal. Additionally, limited customer interest, negative feedback, low engagement rates, or high customer churn rates can also indicate that the market demand for a startup's offerings might be lacking.

If your startup is in its early stages and hasn’t yet started producing revenue or properly testing performance in the real-world market, lukewarm feedback from pilot customers or lack of investor interest can also be a sign your product isn’t aligned with what your audience wants. 

However, it’s important to note that negative feedback doesn’t necessarily translate to an unsuccessful product 100% of the time. Sometimes investor sentiment or initial research isn’t in tune with the true demands of the market. Other times, incredibly negative feedback indicates that your product is divisive—which means that even if some people intensely hate it, others will like it just as intensely.

Solutions: How to stay in tune with the market

The best way to avoid a lack of product-market fit and ensure your product release has good timing is to keep your finger on the pulse of your target market. Conduct thorough market research to gain insights into customer preferences, competitor activity, and the performance of your existing products and solutions. You should also employ customer validation techniques such as surveys, focus groups, and beta testing to ensure that their offerings strike a chord with the intended audience.

Embracing the fluidity of market trends is another essential strategy. By staying attuned to shifts in consumer behavior and industry dynamics, startups can adapt and refine their products to meet evolving demands. 

Reason 4: People problems—Clashing between leadership, teams, and investors 

The last most popular reason for startup failure is a lack of cohesion, agreeability, and shared vision between the people involved—whether they be investors, leaders, or the team at large. 

Like a tribe, family, sports team, or any other group that is bonded over a shared purpose, everyone needs to be on the same page for it to work. When there’s drama and disagreement, it can lead to long-term problems in communication, productivity, direction, and culture. This disharmony can kill even the most promising startups. 

Here are some negative team dynamics that can lead to startup failure

  • Discord among the internal team. A team that isn’t united over a shared vision, purpose, and method of doing things can encounter many problems, including misunderstandings, missed targets, and an inability to follow through on even basic instructions. At its worst, internal drama can cause warring, splitting into factions, and acts of sabotage that distract from getting work done. 
  • Misalignment between founders and investors. If investors and founders disagree on a startup’s mission, it's like a car with two drivers steering it in different directions. This can lead to prolonged arguing over basic decisions, which can cause delays in completing projects, miscommunications among the team, hasty decision-making, and compromises that make both parties lose. 
  • Discord among the leadership team. Disagreement among leaders can easily set the company on a course of confusion and lack of productivity. If one leader says one thing while the other says the opposite, accountability, motivation, and a sense of direction will be lost for the entire team. 

Warning signs of people problems 

If there are people problems at your startup, you can usually tell—as a founder or leader, you’re probably in the middle of them. Ongoing disagreements that never get professionally settled are the biggest sign there’s discord among your team, as well as a generally uncomfortable or tense atmosphere and chronic unfriendly behavior from your team or partners. 

If the problem is happening on a lower level than you’d engage with on a day-to-day basis, signs of team disharmony also include high employee turnover, consistent miscommunication between team members, chronically missed deadlines, and a pervasive sense of disengagement. These signs can indicate that your team perceives the workplace to be toxic, disorganized, or lacking cohesion.

How to solve people problems and restore harmony

There are several steps you can take to restore harmony at your startup and prevent further people problems. The first step is to pinpoint who’s causing the issue. In many cases, a single bad manager or independent contributor spreading negative sentiment could be the culprit. But, the issue could just as easily be more widespread without one specific root perpetrator.

After finding the source, try to encourage an environment of transparency, constructive feedback, and empathy among your team. Implementing feedback surveys (and listening to the feedback) or setting up times for team members to communicate and discuss their disagreements is essential for resolving conflicts. You can even bring in a third party to mediate these conversations if necessary.

Finally, it’s important to cultivate a positive work culture that discourages disagreements to begin with. Ensuring everyone has the space, resources, and opportunities to do their best work and have their voices be heard is key to a harmonious work environment. 

Help your startup succeed with Capchase

Running a startup requires juggling many moving parts, and it’s difficult to have everything working 100% correctly 100% of the time. While you don’t have to ensure everything is perfect, you must keep an eye on some problems that can spiral out of control more quickly than others. Money issues, people issues, and issues with your product are some issues that should be a high priority. 

If you’re primarily struggling with financial problems, Capchase is here to help. Capchase Grow can help you access non-dilutive, debt-free financing in as little as 3 days to get you out of a cash flow bottleneck, while Capchase Pay can help you accelerate your sales cycles, boost your instant access to working capital, and increase your ARR.

To get started, sign up now.