The startup world is often romanticised as a hub of innovation and limitless opportunities. Yet, the reality is a much more sobering story, with many of these innovative ventures not making it past their first few years.

And if research reveals that only 10% of startups succeed, estimates are that only 15% of those that do survive achieve a successful exit of $50 million or more in the top eight US startup ecosystems.

There is no set formula for becoming one of the lucky 10%, and certainly no way of controlling macroeconomic uncertainties that can hurt bottom lines. But, understanding why many startups fail to make it over the line is an invaluable first step for any startup looking to ensure their survival.

Mismanaged finances

Unsurprisingly, the top reason startups fail is the age-old problem of running out of cash, with inadequate budgeting, resource misallocation and poor cash flow management being a highway to failure.

To avoid falling foul of this, startups should prioritise growth opportunities and establish proper financial controls – carefully tracking cash inflows and outflows, keeping expenses in check, avoiding overly optimistic projections and using realistic financial models to prepare for both best and worst-case scenarios. All this requires collaborations with other departments, ensuring projections are realistic and minimising the risk of unexpected shortfalls.

Knowing when to seek funding is also key as timing and the amount of funds raised can determine a company’s future.

Investors need confidence that their funds will be used efficiently and aligned with the company’s long-term strategic goals to ensure financial stability. Founders should raise enough capital to meet key milestones, making future funding rounds favourable. Diversifying funding sources – through venture capital, strategic partners, and grants – also helps reduce dependency on a single source.

Lack of market need or want

Many startups are built on great ideas that don’t always translate into customer demand, with 35% of startups failing because there is no market need or demand for their product. Without a problem to solve or a market to serve, even the most innovative solutions can become irrelevant.

To boost their chances of success, startups need to ensure there is demand for what they are offering. In this instance, tools like surveys, focus groups, and industry reports are invaluable for understanding product barriers and customer pain points within the market you are planning to enter.

Startups must be flexible and ready to pivot based on market feedback. This flexibility can mean the difference between success and failure.

A startup is only as strong as its team

All startups are only as promising as the teams behind them, with poor leadership or weak team dynamics capable of derailing even the most promising ventures.

McKinsey research shows that ineffective leadership and management practices contribute to nearly 25% of startup failures.

Flexibility can mean the difference between success and failure.

To avoid these issues, startups must prioritise strong leadership. Effective leaders have the skills and experience to handle crises and adapt to change. Regular evaluations and coaching can help identify and address skill gaps before they impact the company.

Building cohesive teams is essential. A culture of collaboration and shared vision ensures that everyone is aligned with company goals. Startups should invest in team-building, incentivise professional growth and promote open communication to create a supportive environment.

This works from the top down. Leaders must stay adaptable, open to feedback, and willing to shift strategies with the end goal of fostering a culture where learning from failures is valued, helping the company grow through setbacks.

Keeping KPIs in check

To avoid falling into the common traps that lead to startup failure, leadership teams should keep a weather eye on key performance indicators (KPIs), such as financial health and customer retention, that can serve as early warning signals of things going awry.

When it comes to financial health, a high burn rate and low gross margin of revenue after goods are sold can invariably lead to cash flow issues.

Financial runaways are also essential for any startup to take off. A healthy runway is generally between 12 and 18 months, providing enough time to reach profitability or secure additional funding. If the runway drops below six months without a clear funding or revenue path, it’s a red flag.

Customer acquisition and retention are the make or break for any startup. To get off the ground and reach profitability, the cost of acquiring a new customer should never outweigh the revenue that each customer generates, and the payback time it takes to recover the money spent on acquiring customers should remain under 12 months.

When it comes to testing financial health, high churn rates are a key sign the product is failing to live up to market demand, or satisfy customers. Companies should keep a low churn rate of 5-7% in their sights, using this metric to ensure what they deliver is of ongoing value.

Startups should also keep a close eye on their month-over-month (MoM) and year-over-year (YoY) revenue growth rates. Double-digit MoM growth is often a sure sign of strong market demand for the product, while stagnation serves as a red flag that the product may not fit the market, or scaling efforts.

Lastly, customer satisfaction is integral. By using Net Promoter Scores (NPS), startups can measure customer loyalty, how likely customers are to recommend it to others and also identify deep-rooted issues that need to be addressed.

There is no foolproof formula for startup success and no impenetrable armour to protect businesses from economic uncertainties out of their control. That said, understanding the complexity of the startup landscape and learning from others who have gone before you is essential for any chance of success.

Fail to do so, and you risk becoming one of the 90%.

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