Startup school: How and why do tech startups fail?

Starting a small business is often far more challenging than people realise, especially in the tech industry. The sector remains extremely competitive, with one of the highest business failure rates of any industry. Tech startup founders must have a solid business model coupled with a strong market need for their products or services, however that’s just the start of it.

In the fourth part of our startup school series, we dive into the failure rate and characteristics of new tech companies and suggest ways to help your business thrive.

Tech startup stats

Before diving into why startups fail, it’s important to investigate how many fail — not to deter you, but to inform you of the realities of starting a new business. We’ve all heard the startling talking point that 90% of all startups fail within the first few years, but is that true? And what about startups in tech?

In Australia, the startup failure rate across all industries was approximately 90% in 2019, according to the International Centre for Trade and Sustainable Development (ICTSD). By year, this breaks down is as follows:

• One in three fail in the first year of operation;
• About half fail by the second year;
• Three-quarters fail by the fifth year; and
• Only one in 10 startups continue business.

As the industry with the highest startup failure rate, burgeoning tech companies undoubtedly face even greater odds. However, that doesn’t mean small business owners should lose hope. Instead, each founder should view these startup failure rate statistics as opportunities to learn from the mistakes of their predecessors. 

Why do tech startups fail?

While each startup is a unique case, there are often shared characteristics between them and insights to gain from their failures. As a startup founder, it’s critical to identify these pitfalls and avoid them in your own venture. To help you get started, here are five common issues that can lead to business failure.

Lack of funding

This is a very vague reason as to why a business failed. Oftentimes startups can’t get off the ground simply because they lack investors. However, many venture-backed startups also fail due to reduced cash flow or poorly managed finances. To maximise their money spent, many founders choose a lean startup model and secure capital through multiple funding rounds, loans, and any other methods they choose.

Market problems

Too many startups attempt to market their product or service to every conceivable demographic. While it would be nice to sell to everyone, this strategy is rarely a success. Your startup should instead narrow down and focus on its niche audience. That means identifying its product market fit and ensuring it satisfies the existing consumer demand.

Competitive landscape

The tech industry is an especially competitive landscape, with tight turnaround times on projects. If your startup is unable to plant its feet in the market first, it may be too late to catch up. Successful startups maintain a fast pace to market their products and services, beating out the competition before they even have a chance.

Failure to innovate

In the dynamic environment of modern tech, companies can quickly stagnate, falling further behind the competition and losing customer engagement. That’s why it’s critical for startups to constantly innovate. Their products need to remain flexible and agile to evolve with market needs.

What makes a startup thrive?

While the tech industry is one of the most competitive, it’s also brimming with opportunities, both for the investor and the entrepreneur. 

At home and abroad, the tech industry is experiencing meteoric growth. BDO in Australia’s recent report on Private Equity in Perspective reveals that investment and private equity firms continue to turn towards tech to bolster their portfolios, with the sector being the hottest sector by deal volume, over the last three years.

Successful startups pop up all the time, but for every winning company, there are hundreds of failed startups. So how can a new business owner navigate this landscape and avoid failure? Here are a few characteristics of a thriving startup: 

• They have a product market fit, meaning their product or service satisfies market demands. It’s essential to have this fit, or else your business won’t have an audience to sell its goods;
• They start with strategic markets of an appropriate size rather than attempting customer acquisition in large sectors. This targeted niche enables them to grow a loyal customer base first, before expanding their demographic reach;
• They have a lightning-fast pace to market that beats out the competition, enabling their business to be the first on the ground with their product or service; and
• They maintain a laser focus on organisational goals without overstretching their time, funding, and resources. This is critical to maintaining performance and revenue targets.

In the cut-throat environment of the tech industry, it’s easy for startups to be swept away into obscurity. To help your tech startup find success, ensure you are honest with yourself and your investors when reviewing your company’s weaknesses and areas of improvement.