Failed startups in the business world are inevitable.
But that doesn’t have to stop you in your new business venture. Educating yourself on common business setbacks can give you an unfair advantage.
In this post, you’ll learn from the biggest startup failures in history and ways you can turn potential setbacks into lessons and opportunities.
Let’s dive in.
Common Reasons Startups Fail
Before we explore the biggest failures in startup history, let’s look at some universal ways businesses fail in the first place.
Lack of Product Market Fit
One of the most common reasons businesses fail is there is no need in the market for the product.
In other words, no product market fit. Establishing this is essential in the early days for startup founders. But market changes can also impact business success if they don’t adapt. More on that in a second.
Since the startup failure rate is notably high, some of the best ways to validate a business idea are to conduct market research, analyze the competition, and create a minimum viable product (MVP).
A great book to help with this subject is The Lean Startup by Eric Ries.
Inadequate Capital
Insufficient funding or no assets that generate cash flow is another reason startups fail.
This can happen for several reasons, such as underestimating capital needed for new product launches and overestimating product demand, resulting in excessive spending.
Poor Management and Decision-Making
Without processes, strategies, and effective communication in place, the direction of the business becomes unclear.
This can lead to poor decision-making and management, which can make or break a startup.
This is why the role of leadership is crucial in every business venture.
Failure to Adapt to Market Changes
The current rate of change in technology and business is at an all-time high. Thanks to AI, this rate of change is only speeding up.
This is what causes a lot of startups to go bust because they fail to move with the times.
To stay ahead of the game, it’s essential to watch for emerging trends, consumer behavior shifts, and innovations in technology.
Adopting the use of market intelligence tools can help a lot in this domain.
High Competition
High competition is another way startups go under. When new businesses try to compete with established players, they can lose sight of why they started.
What’s more important than “beating the competition” is differentiating yourself and offering innovative solutions and experiences that resonate with your potential customers.
When you understand your market better than the competitors, the competition becomes irrelevant.
5 Notable Failed Startups You Need to Know About
1. Quibi
Quibi was a tech startup streaming service that launched in April 2020, just weeks after the global pandemic hit.
Founded by Jeffrey Katzenberg and led by CEO Meg Whitman, the platform aimed to deliver short-form content for people on the go.
Even though Quibi raised a staggering $1.75 billion, the service shut down in December 2020, only six months later.
Reasons for failure:
- Lack of market need: The content was exclusively available on mobile devices, which limited accessibility. Users were also unable to share content on social media, which hindered the platform’s growth.
- Bad timing: The timing of the launch couldn’t have been worse. Plus, as the service was designed for on-the-go consumption, the idea flopped when lockdowns kicked in.
- Poor financial management: The company raised a large amount of money before proving its concept with an MVP. They also spent a lot of that capital on content and marketing before establishing product market fit.
- Lack of good content: Much of the content available was sub-par and lacked originality. People were already invested in other platforms like YouTube and TikTok that provided more engaging content for free.
2. Jawbone
Jawbone, founded in 1999, initially focused on developing voice communication technology with superior noise suppression for organizations like the U.S. Navy.
Then, in 2007, the company released its first Bluetooth wireless headset with noise-cancellation and voice-detection capabilities. They also released wireless speakers known as the JamBox, which garnered positive reviews.
By 2014, the company made close to $900 million and was valued at around $3.2 billion.
Reasons for failure:
- Financial struggles: Jawbone’s revenue peaked at $900 million in 2014, but low gross margins caused financial challenges, which contributed to its decline.
- Customer service issues: Financial struggles led to a poor customer service experience, leading to many angered customers.
- Legal disputes: They had legal battles with FitBit over trade secrets and patent infringements, which contributed to drained resources.
3. Theranos
Theranos was a health technology company founded by 19-year-old Elizabeth Holmes in 2003.
The company claimed the technology could perform a wide range of tests from just a few drops of blood, leading to cheaper, faster, and more accessible blood tests.
Theranos achieved wild success before its fall in 2018. They partnered with Walgreens, raised over $700 million in venture capital, and were valued at $10 billion at its peak.
Holmes was even named the youngest self-made billionaire by Forbes. Then, in 2015, the truth started being revealed about the legitimacy of the technology.
Reasons for failure:
- Technology skepticism: Investigative journalism by The Wall Street Journal revealed the technology wasn’t as effective as the company had claimed.
- Fraudulent claims: By 2018, the U.S. Securities and Exchange Commission charged Holmes and her former business partner with fraud, and both were eventually imprisoned. Homes was sentenced to 11 years and three months, and Balwani, 12 years and 11 months.
4. Webvan
Webvan, launched in 1999 by Louis Borders, was an online grocery service. Its goal was to revolutionize the grocery industry, enabling customers to order food online and have it delivered within 30 minutes.
The business built highly automated and state-of-the-art distribution centers to handle logistics and deliveries.
Impressed by its vision of efficiency and growth rate, Webvan attracted almost $800 million from investors. It also went public the year of its launch, raising an additional $375 million and gaining a market valuation of $6 billion.
Despite its initial success, the company had overspent its capital and filed for bankruptcy in June 2001.
Reasons for failure:
- Overexpansion: Webvan spent way too much on distribution centers too quickly, even before testing its capabilities. It also branched into multiple markets without first proving its business model.
- High costs: The rapid expansion came with extremely high costs, with each facility costing around $30 million, leading them to unsustainable financial challenges.
- Operational challenges: The managing of operations became more complex than initially anticipated. From grocery deliveries to maintaining the best temperature for food, customer service started to decline.
- Lack of industry experience: All of Webvan’s executives had zero experience in the grocery industry, which contributed negatively to the company’s growth.
5. Yik Yak
This last failed startup example has a plot twist. Keep reading to find out.
Yik Yak was a social media app founded by college students Tyler Droll and Brooks Buffington. Initially launched in 2013 for users to view and share content with people within close proximity to each other.
It became popular on college campuses to have discussions with other students within a 5-mile radius. The app gained traction and raised $73.5 million in venture capital in its first year. Yik Yak had over 1.8 million active users, mostly college students by early 2014.
In 2017, the app was shut down and acquired by Square Inc. for its talent and intellectual property.
However, Yik Yak was relaunched in 2021 on iOS devices with a commitment to make the app a “fun place free of bullying, threats, and all sort of negativity“.
Reasons for failure:
- Cyberbullying: Its main feature was anonymity, which provided a breeding ground for cyberbullying, hate speech, and threats.
- Decline in user engagement: By the end of 2016, downloads had plummeted by 76% compared to the year before. The company added new features in the hopes of sparking more interest, but it wasn’t enough.
- Financial struggles: The company laid off over half its staff to cut costs and pivot its strategy, but these efforts weren’t enough to avoid closure.
Near-Failed Startups That Bounced Back
1. Reddit
In recent months Reddit has seen huge organic traffic growth thanks to Google algorithm changes. The site, as of May 2024, gets around 600 million visitors per month.
Even before this huge spike, Reddit has become one of the most visited sites online.
But they didn’t start this way. In the early days, founders Steve Huffman and Alexis Ohanian created tons of fake accounts because no one was joining the site.
They created fake conversations between fake users to get traction from real users. And it worked.
Whether this tactic would work today is another question. It’s the reason why social app IRL shut down due to 95% of its users being fake.
2. GoDaddy
Just four years after Bob Parsons, founder of GoDaddy, launched the hosting company, he almost shut it down.
Due to financial strain and a downturn in the industry, Parsons took a trip to Hawaii to consider how he would go about closing it down.
However, Parsons had an epiphany and a change in perspective. After witnessing the happiness of a hotel valet, he decided to reconsider his decision to close GoDaddy and resolved to persevere with it, showcasing the resilience seen in many successful founders.
His decision paid off, and the company broke even for the first time that year.
4 Crucial Steps to Avoid Startup Failure
Now you’ve gained some valuable insights from the biggest startup failures, let’s look at some steps you can take to avoid the same mishaps they did.
1. Conduct Thorough Market Research
Understanding your market and target audience is vital. As an entrepreneur, market research equips you with insights into audience behavior, pain points, and motivations, as well as competitors and market trends, which is crucial for business owners.
By conducting research, you can validate product ideas, mitigate risks, and make better decisions.
This process involves using tools to gather data on the current landscape of the market. You can also use surveys and do keyword research to see what your audience is searching for.
You can also engage with your target audience through social media channels to understand their needs and formulate potential solutions.
2. Ensure Adequate Funding
Another crucial step in startup success is to secure adequate funding. This is particularly important in the early days of your startup.
Capital will help in developing products, cover operational costs, and contribute towards marketing.
Without enough funding and managing finances carefully, small business and venture backed startups will struggle with cash flow issues and maintaining growth.
To secure funding for your startup, there are a few options to choose from. These include equity funding, loans, and even bootstrapping.
3. Build a Strong, Adaptable Team
Your team is the backbone of any successful startup. It’s about hiring the right people who are enthusiastic about your company’s mission and goals.
It’s important to look for traits and skills that foster collaboration and adaptability. The diversity of talent will go a long way in problem-solving while strong leadership will maintain growth and a healthy culture.
Some excellent ways to find the right people are to attend industry events and meetups, network, and use job boards or recruitment platforms.
4. Stay Agile and Adapt to Market Changes
This one is crucial, especially in today’s ever-changing landscape. With the progress of artificial intelligence and other technological advancements, adapting to market changes mustn’t be overlooked.
The information age calls the shots. So when technology advances, the market and the way consumers buy also change. Therefore, it’s important to innovate and to be flexible.
A good example is when Slack pivoted from a video game to the most successful messaging platform for workplaces, showing how successful founders can turn challenges into opportunities.
Conclusion
Understanding the common pitfalls that lead to failed startups is the best way to avoid the demise of your own.
By following the tips in this post and learning how other businesses have failed, you can steer your startup in the right direction – toward success.
Just remember that failure doesn’t mean closure. And more importantly, failure is often necessary for growth and innovation to occur.
