Why do startups fail, and what can founders do to prevent it?
Many entrepreneurs and investors opine on this question, but few offer data-driven answers. Our goal is to identify and share clear learnings on this, and the timing could not be more critical.
In 2020, the U.S. Internal Revenue Service received more than 4.4 million applications for new businesses according to the Bureau of Labor Statistics (BLS).1 In the second, third, and fourth quarters, business formation topped every quarter since 2005. Although COVID-19 has shuttered almost 30% of small businesses, it is simultaneously responsible for the 21st century’s greatest surge in entrepreneurship.2
For would-be founders, there’s no avoiding the undeniable: sustained success is statistically unlikely. Nearly a fifth of new businesses shut down in their first year according to BLS data.3 Even with venture backing, a staggering three-quarters of startups fail according to research by Shikhar Ghosh of Harvard Business School.4 However, fear of failure shouldn’t prevent anyone from starting a business.
One great way to raise the odds of startup success is to learn from current and past entrepreneurs. Towards that end, Wilbur Labs surveyed more than 150 startup founders about the pressures that threatened their businesses. We also pulled records of 350 startup failures from CB Insights and Autopsy then analyzed them for patterns. The resulting insights can help founders improve their odds of success this year and beyond.
When founders solve significant problems and avoid preventable failures, everyone stands to benefit. In that spirit, we’ll examine why startups fail (i.e., shutdown permanently) and how they overcome potential failures.