Startups' Success and Failure Rate in 2023

Article by:
Maria Arinkina
14 min
Starting your own startup is always a huge risk, yet many companies manage to thrive and become unicorns. What percent of startups fail? And what influences the startup success rate? Let's take a more in-depth look.

Deciding to take off on the journey of starting a startup is like passing the threshold of a bustling casino. The possibilities of making bank are high, but so are the risks and stakes. With startups, the fear of failure and anticipation of probable success intertwine.

Although all entrepreneurs dream of hitting the jackpot, in the startup world, success and failure go hand in hand. Some achieve incredible results and growth, while others leave empty-handed. Statistics reveal that around 90% of startups don't make it. Indeed, this is a sobering reminder hinting at the many challenges and obstacles that lie ahead.

But what can we learn from those who've claimed victory and lost it all? On this page, we'll look into the startup success rate and the startup failure rate and delve into the reasons why this happens to uncover valuable insights and lessons that were left behind.

Defining a Startup

First things first, what is a startup? Typically, a startup is a business venture or a young company that's in its early stages of development. A startup's major focus is building a unique service or product that will be capable of solving a user problem and delivering value.

In many cases, the teams are small (with the startup team structure ranging anywhere from a solo founder to up to thirty people performing multiple roles before the staff expands). The financial sources may also vary, as some are self-funded or bootstrapped, while others get loans or go through multiple startup investment stages to obtain the necessary support from venture capitalists or investors.

What are common startup traits? Well, it's safe to say their innovative nature. Such organizations are constantly pushing boundaries toward novelty in an attempt to change the traditional way of things. They are flexible, adaptable, and keen on learning.

This is why teams usually apply the lean methodology. It implies doing in-depth research, collecting feedback, conducting ongoing tests, and spending time on startup analytics to study the results, make corresponding iterations, and optimize processes based on findings, not guesses.

Hence, because startups strive to cater to the target audience's needs and fill a market gap, the teams often begin by building a minimum viable product and gradually mold it to become a full-scale one. Moreover, such companies share a few more common characteristics: rapid growth, being ready to take risks, aiming at maturity and sustainability, with making an exit often being a final goal.

Certainly, this was a brief and generalized definition, as every startup's focus, aims, size, and path vary. And just as those who walk into the casino, the thrill lies in uncertainty, and for those individuals who are up for the dare, the risk becomes an essential part of the game. But what percent of startups fail?

10+ Reasons Why Startups Fail

Running a startup is somewhat similar to stepping up to the roulette wheel when every decision seems as if it's a calculated bet. Founders do their best to place their bets wisely as they form their vision, work on their plans, and develop the strategy. However, according to the startup failure rate, most don't manage to beat the odds, as the spinning wheel holds the power to change their fortunes in a split second.

Why does this happen? To be fair, there's hardly ever just a single reason leading to the downfall or bankruptcy (usually, it's a combination of several factors). Let's examine the major startup failure reasons and the issues that contribute to unwanted results based on the findings of CB Insights and other sources.

Most common reasons for startup failure

Insufficient Funding

Lack of funding is one of the most significant reasons hindering a startup from achieving its set goals. Numerous recent statistics show that running out of money or not being able to raise capital is the number one reason for startup failure.

A startup budget isn't elastic. Therefore, if the teams spend money on their operations irrationally and their supply runs out sooner than expected, chances are they won't make it or will be bound to pause the project until they get more money. 

The biggest problem is that pitching to investors and obtaining funding is never easy. Thousands of startups compete for the VC's attention (and they're a tough crowd to convince). The process could take months or even years, forcing many startups to close down.

Misaligned Product-Market Fit

Surprisingly, one of the most frequent startup failure reasons is that there's no market need or demand for what the startup is offering. That is, the product doesn't resonate with the audience. Generally, this signals that the team hasn't thoroughly done research during the discovery phase or hasn't validated the feasibility of their ideas well enough.

Another core failure reason is targeting the wrong market. In this case, the product can't achieve product-market fit due to the fact that the team doesn't go after the right audience. If they don't manage to identify the niche or the proper customer groups, it becomes close to impossible for the product to gain traction and attract buyers.

Inadequate Research

Market research plays an important role in product development, too. You have to be certain about what you're creating, why, and for whom before you proceed to the "how". When teams don't take hypothesis validation seriously and base their decisions on guesses without facts to back up their moves, all actions become a shot in the dark.

Proof of concept (POC) and studying the market and users is a fundamental step that must be taken before you move on to designing and developing the product. Otherwise, the whole endeavor can be a waste of time and money.

Mistimed Launch

Knowing when to launch an MVP or product is crucial. Releasing something "undercooked" too soon or taking too long to get the product in the users' hands may result in doleful consequences. Hence, timing matters a lot, influencing the startup failure rate.

Lack of Flexibility or Pivot Failure

On a similar note, teams that couldn't spot the need to make a startup pivot or act on it in time also crashed. A startup has to be fast to react to changes and be flexible enough to adapt. If this isn't the case or the pivot didn't go well, it's another factor leading to failure.

It'll be tough to take operations to the next level and achieve startup scaling if the teams aren't capable of adapting to the market conditions. So, the same goes for pre-mature scalability or not being able to scale timely.

Bad Product Quality

As follows from the above, if the product can't live up to the users' needs and expectations, this won't bring any positive outcomes. This is specifically why it is crucial for startups to look into feedback, continuously work on MVP testing, and make data-backed decisions.

Even the MVP design has to be user-friendly. A startup can begin with something simplistic, but the product has to solve a user problem and bring value. Otherwise, early adopters will be disappointed, and no one will be anticipating its consequent versions. However, by opting for building an agile minimum viable product, startups can safeguard themselves from such unwanted outcomes.

Unsustainable Business Model

A business plan is more than just a draft that includes scraps of brainstormed ideas. The strategy has to be concise and must document the fundamentals of the startup, including what you stand for and how you'll reach profitability.

If the "blueprint" is shaky, the entire business could be prone to disaster, promoting the overall startup failure rate. As such, an incomplete business plan may include issues with pricing and the selected monetization strategy or have an unrealistic product development roadmap.

Ineffective Sales and Marketing

A poor marketing and sales strategy can also do a startup and its product harm. Creating hype and spreading the word about the product is important for obtaining your first users. That's why many entrepreneurs choose to build in public, are active on social media, and interact with the community even before the solution is built. If the team neglects marketing and sales, decent acquisition, revenue generation, and product success will become a fantasy.

Not Enough Knowledge

Commonly, the founders who take on many roles or have several one-man-band people on the team lack the necessary knowledge, qualifications, or experience. Even if you're equipped with the best startup tools, using them improperly or running the operations like an amateur leads to costly startup mistakes. For example, tech issues due to weak cybersecurity can push the startup down a cliff. Therefore, it is important to turn to advisors and, preferably, start a startup if you're an industry expert or have previous experience in running a company.

Fierce Competition

If the competition is tough and there are bigger and stronger players, it gets hard for early-stage products to stay afloat and find their place among the other offers. Gaining a competitive edge is not a simple task, and it might take a lot of time and effort to establish a strong foothold. For this reason, many entrepreneurs take a shot at entering programs such as accelerators, as this may allow them to obtain invaluable knowledge, connections, and opportunities for growth.

Legal Problems

Issues on the legal side can also make things difficult for startups. Having gaps in paperwork, official registration, licensing, permits, and other documents pose severe threats and consequences. Such regulatory inconsistencies can result in heavy fines and complications.

External Factors

The market state and other outside factors can also pose a challenge to startups. Be it an unforeseen global crisis, an economic downturn, or some drastic regulatory changes, teams might not be prepared for them or have enough resources to live through the turbulent times. A great example of this was the COVID-19 impact on various-sized businesses around the world.

Burnout or No More Passion

Sadly, some startup founders or even teams decide to fold up the project because they're out of passion to keep going. Sometimes, running out of mental and physical resources forces teams to quit, which is a common scenario when the startup is a side hustle for most involved parties. If people aren't psyched enough about the startup's mission or don't believe it'll work out and bring back desired results, they can get distracted and lose focus and interest in participating.

Team Disharmony

The inability to create a decent startup culture can also twist things up. If the team dynamics are ineffective and the teams are out of sync, there won't be efficiency and mutual understanding. An unorganized and chaotic work environment brings disharmony, backpedaling progress and other integral processes simply because communication and task management are off.

Wrong People on the Team

Finally, one more factor that can trigger startup failure is the people behind its creation. Finding the right employees and specialists to contribute to the project is a complicated task. Not to mention that hiring developers for a startup can take lots of time and "gobble up" a large portion of the budget.

In fact, many things can go wrong with human resources and recruitment. Sometimes, startups end up spending too much on in-house employee payrolls than they can afford or hire talent part-time on freelance web developer sites and end up having disrupted deadlines due to a scattered team with partial availability.

However, many such risks can be avoided if you find a reliable tech partner with a proven track record. There are many MVP development companies and outsourcing models to choose from. Vendors can quickly provide startups with well-versed, experienced, augmented teams. This path can speed up development and time-to-market, bring in valuable external knowledge, and cut lots of operational costs on things like paid time off, purchasing hardware and software, office rent, and other expenditures.

Looking for a tech partner for your startup?

Upsilon helps startups develop their products at any stage.

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Startup Failure Rate by Industry

What are the leading startup industries today? Fintech, Healthcare, AI, gaming, and Edtech are among the most widespread ones.

But which industries are most vulnerable or difficult to survive in? Here are a few curious discoveries based on numerous sources.

Startup Failure Rate by Industry
  • Startups in the IT industry are highly prone to failure. That said, the tech startup success rate is less than 50%. On average, 63% of tech startups don't make it, 25% close down during the first year, and only 10% survive in the long run.
  • Venture-backed fintech startups fail in 75% of cases.
  • Topping that, blockchain and cryptocurrency startups have a shocking 95% failure rate and a very short lifespan.
  • Startups in the e-commerce and retail sectors fail in 53% of cases.
  • Another exposed startup sphere is construction, which also has a 53% failure rate.
  • Next comes manufacturing, with a 51% startup failure rate.

Startup Failure Rate by Stage

Do the stages of startup development influence the chances of business success? Let's overview the startup failure rate depending on the ventures' stages. 

Research suggests that the overall failure rate of startups that are new is 90%. Although it might be hard to believe, the first twelve months in operation aren't the most challenging ones. On the whole, 10% fail during the first year, which implies that approximately one in ten companies don't make it and give up.

Startup Failure Rate by Stage

The same resource states that at the age between 2 and 10 years, a startup's chances to survive drastically go down:

  • those who have passed the two-year mark have a 20-30% failure rate;
  • 45-50% cease to exist before or during the fifth year;
  • 65-70% of startups go out of business within the first decade of their existence;
  • as little as 1% of startups grow to become a unicorn (a startup term meaning the company is valued at 1 billion USD).

Practically no startup reaches profitability within its first year, especially if it's early-stage. This source suggests that it takes a startup 3 to 4 years to become profitable. However, only 40% of scale-ups manage to make money in general (meaning that only 2 out of 5 startups are profitable, whereas ⅓ break even). What's for investors, on average, up to 35% don't get their money back, whereas ¾ of VC-backed startups lose their investors' money.

Startup Success Rate

So, what is the success rate of startups? As mentioned earlier, 9 in 10 startups make it through their first year, and 50% survive the first five years. In the long run, though, the success rate of tech startups and non-tech companies alike falls between the 10%-20% range.

How founder experience influences startup success

Interestingly, according to recent findings, only 18% of first-time startup founders succeed. But this doesn't mean that they won't use prior learnings to their benefit next time (which explains the success rate growth of up to 30% for companies initiated by founders who have established businesses previously). Hence, experience in running startups is also a factor contributing to the success rate of startups.

What Conclusions Should Startup Owners Draw? (Founders' Advice)

Undoubtedly, the startup failure rate can be intimidating and discouraging. We've looked into the factors that separate the winners from the losers. Although each startup's path is unique, by analyzing these pitfalls and challenges, aspiring founders can learn from the mistakes of others, mitigate risks, make more informed decisions, and navigate their startups better to tilt the odds of making it to the top.

Weak cash flow is among the major problems leading to failure. And it's hard to convince investors to give you their money since they always keep their eye on the ball to prevent their investments from going to potentially unsuccessful companies.

What do investors pay attention to most when they review offers? And what should you give more attention to during pitch deck creation? Investors thoroughly examine the business plan to evaluate the possible return on investment. Therefore, startup owners have to:

  • provide detailed research and data;
  • be clear and concise about the legitimacy of the target market;
  • give only data-driven financial projections;
  • state the existing competitors;
  • explain their ​​approach to addressing probable issues;
  • be prepared to go through technical due diligence;
  • and note other vitals based on the industry. 

Learning from the Experience of Successful Startup Founders

What do founders who've successfully launched startups have to say? Upsilon has been interviewing startup founders and aspiring entrepreneurs for quite some time. Here are some notable tips and recommendations from our Startup Stories.

Advice from Successful Startup Founders

Deciding to launch a startup is frightening, as every path is different, and you never have guarantees that it'll go off all right. Chafik Belhaoues, founder of Brainboard, puts it this way:

"Starting a company is connected with a lot of uncertainties. You don't know how it works, who will buy your product. That's probably the reason why many startups fail. They just don't know how the future will look. For me, the most challenging part was learning non-technical parts of doing business, like marketing, sales, conducting user interviews, creating a go-to-market strategy, etc. It was challenging for both of us, my co-founder and me, because we are tech guys."

As we've mentioned earlier, experience in running startups and being an industry expert with the necessary knowledge visibly boosts a startup's chances of success. Cory O'Daniel, founder of Massdriver, is a great example. He spotted a problem that could be solved and decided to start a company where he could contribute his own knowledge and deliver a valuable solution to the target audience:

"Massdriver is my third startup. The inspiration came from a consulting role that I was doing. I worked with Google Cloud helping organizations migrate from data centers to GCP. Before GCP, I worked at a few small companies and experienced the pain of scaling up the operations team. Fast forward a few years, and I'm helping migrate these multi-billion dollar organizations, and they are suffering from the same problems. This is the problem we want to solve. Help growing organizations scale their operations teams and practices effectively without compromising security or software delivery cadence."

How difficult is it to be a non-technical founder? This is what Daniel Steele, co-founder and CTO at eola, thinks about starting a business without any background in the field and why having a co-founder is a good idea instead of running solo:

"Personally, I would never start a finance-based company without a co-founder who has a deep understanding of finance. Similarly, I wouldn't recommend starting a tech company without a co-founder or highly experienced leader from day one who truly understands how to bring your vision to life. Therefore, I strongly encourage anyone starting a company in any industry to ensure that at least one member of the founding team has the ability to think about how things are practically implemented and executed. If I were to start another company after eola, I would definitely choose to have a co-founder again. Not only does it provide a broader range of knowledge, but it also offers emotional support."

Recruiting the right people is another common issue for startups, both in terms of trust and budget. The developer recruitment process is always challenging, and this is what Chris Priebe, founder of Zelt has to say:

"If you can't write code, you're dependent on others. This means you either need a co-founder who can code and doesn't need a salary, or you need to raise money to pay others to do it for you. Even when you have the funds to pay others, you need to trust that they will produce work that is reasonably built, so you don't have to start again after six months or a year. Definitely, it's a handicap, and you take a bit of a risk because whoever you hire, you will not know for sure that it's going to work out."

He also notes how the challenges a startup faces change over time:

"You need to hire people for stuff that you actually don't know about. So you need to kind of figure out how to do that. Then it's more about how do we find more marketing channels? What channels work better than others? Measuring all this stuff? Now that we have customers, we can do all these analytics. So you have to put all this in place. This is a really different challenge from the first six months, and I think that's also the exciting bit about launching a company. Being a founder is that the challenges change all the time.

What would I do differently? Probably small things, but nothing major. I think in each problem that you face, there are 12 possible solutions, and 10 of them work."

Timely scaling is also a tight turn for many startups. Max Brenssell, co-founder and CEO of Spoke, said the following about the challenges of fast-growing companies and startup team scaling:

"So at N26, we grew from 60 or 80 people to around 1500 in three years. From my and my co-founder's experience, if the team grows so quickly, and the company as a whole grows so quickly, you have an explosion in stakeholders that you have to deal with. And it's very hard for people to break out of old habits. So if you've been there from an early stage, you know exactly who to talk to. But then, if you keep adding new people, they don't have that same level of knowledge. This will create a lot of noise and inefficiency in the organization."

Funding and the financial side are other fundamental challenges for startups. And some founders are in two minds about whether it is worth joining accelerator programs. This is the opinion of Alyona Medelyan, co-founder and CEO of Thematic:

"We loved our time in YCombinator. Back in 2017, Thematic tripled its revenue and received $1.2 million in the seed funding round thanks to the accelerator. You learn not just tactical advice but also a mindset of focusing on the right things. It's been a transformative experience for us in the early days of Thematic."

Many startup founders fail because they lose focus. They emphasize the idea of making an exit too much instead of delivering value to users. Here's what Justin Wiley, Chief Business Officer at Replo, has to say about his previous experience selling an electric bike share company (their firm got acquired by Uber for $200 million):

"Our pilot project demonstrated incredible utilization rates, up to 10 rides per bike per day. These impressive results caught Uber's attention, and we began discussing the possibility of integrating our system into their platform. So, our focus wasn't on selling the company; it was about connecting and integrating our offering with various transportation modes to provide a comprehensive and accessible solution for urban mobility."

Multiple founders choose to close down their startups because of lack of passion or not enough perseverance. Julien Quintard, co-founder of Routine, underlines the following:

"Go into entrepreneurship only if you are passionate about a problem or a subject topic because it's going to be a marathon (which means that it's going to take maybe 5, 10 years for you to succeed or even to fail). And if you're not passionate, you will stop because it's just impossible to do this if you don't have faith in what you do. You've got to be persistent until the end. And that goes with the first point: if you don't believe in yourself or what you're trying to do, you will end up facing many reasons to stop.

When I raised capital, I talked to more than 150 investors, and only 10 said yes. I had 140 rejects. If you're incapable of taking those nos and still believe in yourself, it will be too hard for you. But remember that nobody knows. You've got to be strong, believe in yourself, and continue doing."

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Major Takeaways on the Startup Success Rate

Venturing on the startup journey is a daring leap into the unknown. Just as it happens in casinos, the startup realm is risky, and some "players" walk away with fortunes while others lose. Those daring entrepreneurs who decide to embrace the challenge take risks in the pursuit of creating something extraordinary. But the rewards may be life-changing and worth every "gamble" if they make it.

If you need assistance with product design and development, Upsilon's expert team can lend you a shoulder to lean on. Helping startups create and grow products is our specialty, so feel free to reach out to us for MVP development services for startups and to discuss your needs!

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