There are plenty of localized studies that will give you extreme startup failure statistics.
But if you want a personal glimpse of this industry, take a look around in your friends and family circles and see how many of them launched a side hustle or business and are successful.
For the ones looking for more exact figures, I collected these interesting startup failure statistics.
Let’s dive right in.
Top Startup Failure Stats
Here are the five most compelling startup failure statistics I found; read on to find more details on these.
- Only 2,860 startups since 2000 have reached the unicorn stage.
- 40% of startup founders pivoted their business to avoid failure.
- 80% of e-commerce startups fail.
- According to BLS, 23.2% of startups fail within the first year.
- Only 23 Cloud 100 companies are currently cash flow positive.
The Current State of Startups
Many people I know think of startups as businesses that receive venture capital funding.
Truth is, startups can be as simple as your neighbor starting a home-based delivery restaurant.
The following statistics define startups as any registered business, whether it’s funded, bootstrapped, or just running.
38% of startups fail because they run out of money. (CB Insights)
With lesser venture capital funding to go around, the chances of a startup running out of money before it reaches net positive ROI are high.
Most startups bank on a new idea to catch up and more often than not, it takes a while.
A while can be years and that’s more than enough time to run out of money.
What’s interesting is that 27% of startups fail because they have a product without a business model.
That means they received funding before they could determine how to make money with their products.
Only 2,860 startups since 2000 have reached the unicorn stage. (Dealroom)
It’s hard to put a number on the total number of startups launched across the world. But a 2018 CB Insights study found that the chances of a startup becoming a unicorn are about 1%.
Furthermore, according to Dealroom, there are around 249 unicorns that are rumored to have unicorn status but aren’t verified.
Only 4.6% of startups become scaleups.
Scaleup rates tend to vary based on which stage they are formed in. For example, the study found that only 2.5% of startups formed in the activation-phase ecosystem became scaleups ($50 million valuation).
8.7% of startups in the integration-phase ecosystem scale up by at least 3.5X or more.
According to BLS, 23.2% of startups fail within the first year. (Bureau of Labor Statistics)
Since the 90s, first-year failure rates have been fluctuating between 20-24%. As we move forward we see slightly more variation.
For example, 32.8% of businesses fail within the first two years. 36.2% of businesses fail within the first three years.
Only 23 Cloud 100 companies are currently cash flow positive. (TechCrunch)
That means 77 of the Cloud 100 companies are still not profitable. That said, 34% of the companies expect to be generating cash instead of burning it by the end of 2024.
The average valuation of a Cloud 100 company right now is $6.6 billion. That is a 10% decrease from 2022, when it was $7.4 billion.
Despite healthy valuations, being at cash flow breakeven today means that a startup has officially made it.
Startup Failure Market Statistics
The startup market consists of small bootstrapped businesses and large enterprise-backed startups alike.
Regardless of size or backing, the startup market has seen a decline in the last year.
Total venture spending in Q4 2023 was $58 billion, the lowest in the last five years.
The startup industry has been booming for a while now and with 2020’s pandemic, 2021 broke records with the highest numbers in venture funding.
However, since 2021, there has been a decline in venture spending across the fold and 2023 turned out to be the worst year in the last five.
For the sake of comparison, venture spending in Q4 2021 almost hit the $200 billion mark.
That said, angel seed funding has been stable to an extent and early-stage funding has seen relatively smaller changes.
The highest impact has been on late-stage venture funding. Despite these numbers, analysts and investors alike are predicting improved funding levels by the end of 2024.
The predictions weigh more towards the stabilization of venture funding across the startup industry.
Seed funding in the US fell to $11.5 billion but has been robust compared to overall funding levels.
Over the last ten years, seed funding in the US has been witnessing steady growth, with a sharp increase in 2021.
Because of that, 2022 was the best year of seeding funding in the US in the last 10 years, with seed funding peaking at $16 billion across more than 6,000 deals.
This was impressive because globally, seed funding was taking a downturn. In fact, there was a 35% reduction in seed funding globally while the US seed market witnessed 10% growth.
But, the US seed industry saw a 31% decline in 2023 at $11.5 billion across more than 4,000 deals.
Despite that drop, the decline was less severe than other funding stages, as we saw in the previous stat.
If we exclude the sudden increase in seed investments post-pandemic, 2023 can be considered as the normalization of US seed funding growth.
VC investment in Fintech startups dropped to $42 billion in 2023, a 63% drop from 2022. (Dealroom)
In 2022, the VC investment in Fintech startups was at $90 billion, while in 2021 it was $137 billion, the highest it has ever been.
Compared to 2021, 2023 funding is almost one-third of 2021 funding.
The study also found that the US and Europe now account for 68% of global fintech funding, compared to 40-50% back in 2016-2018.
How Entrepreneurs Are Using Startup Failure
A 2008 study from the Harvard Business School found that first-time entrepreneurs have an 18% chance of success.
Entrepreneurs who have previously failed have a 20% chance of succeeding. And, venture capital-backed entrepreneurs who start a company that goes public have a 30% chance of succeeding in their next venture.
Here’s the current state of entrepreneurs.
84% of founders are focusing on sales, research & development, and marketing.
Due to current economic conditions, the chances of startup failure have increased. That’s why founders are moving back to basics and are looking to drive profitability and growth.
That’s why 33% of them have sales as their priority, another 33% are focusing on research & development, and 18% are focusing on marketing.
This is a bid to ensure that their startups remain at net positive ROI. That’s how they are going to receive more funding, especially in times when venture capital has become relatively scarce.
More funding and net positive ROI is the best way to avoid startup failure, and the best way to achieve that, other than a good product offering, is a robust sales and marketing backbone.
Startup scaleup rates increase by 6.5% for founders with a Global Connectedness Index greater than 6.
Scaleups are the evolution of startups. They are commonly designated as startups that have grown at a 20% annual rate or above in terms of turnover or number of employees.
The Global Connectedness Index refers to how many connections a founder has to other founders in top global startup ecosystems.
It’s no secret that having more connections leads to a greater chance of success. More opportunities for funding, better employee referrals, assistance with expansion; these are only a few advantages that come with the right connections.
Scaleup rates increase by 2.6% when founders have a GCI between 4-5.9 (Medium Global Connectedness). They increase by 2% with a Low Global Connectedness (GCI: 0-3.9).
This is why most entrepreneurs are pushed toward building connections with other founders, especially in markets they plan to expand.
Just like how a high GCI increases the chances of becoming a scaleup, it reduces the risk of startup failure.
50% of founders recommend a stronger business plan to prevent startup failure.
A robust business plan includes a long business model, expansion plans, product lines, and a realistic timeline, among other things.
In other words, direction and contingencies are recommended. 47% of founders also said that finding more financial backing and investors is important to avoid startup failure.
39% of founders said that better marketing is the key to avoiding startup failure.
33% of founders recommend doing more research prior to launch to avoid failure.
40% of startup founders pivoted their business to avoid failure.
Pivoting refers to changing the scope of your company or product. That means if the product solves a certain problem, it’s possible that it is no longer a problem by the time the company has a market-ready product, so they then need to pivot to solve a different problem.
This often happens in startups that aim to solve a redundancy issue in other companies. More often than not, the other company ends up releasing the startup’s product as a feature.
Wilbur Lab’s research also found that 69% of founders who planned to pivot were confident that they would succeed.
Startup Failure in SaaS
The SaaS startup failure rate is similar to the typical startup failure rate; somewhere around 90%.
Personally, I’ve noticed that most SaaS companies end up pivoting to save themselves.
80% of e-commerce startups fail. (SPD Load)
The most common reason for startup failure in the e-commerce industry is bad target user research.
The healthcare industry also has an 80% startup failure rate. That’s followed by the fintech industry at 75% and the EduTech industry which has a startup failure rate of 60%.
B2B marketplaces witnessed a 36% decline in funding.
In 2023, B2B marketplace startups raised a total of $6.3 billion, compared to $9.9 billion in 2022.
It was more than three times less than in 2021 when the total amount raised reached $19.4 billion.
A good majority of these funding rounds went to late-stage startups. Early-stage startups accounted for less than 5% of all funding in this ecosystem.
Startup Failure Recent Trends
Due to the massive boom in startup funding in 2021, the decreasing figures for 2022 and 2023 seemed problematic.
However, startups and VCs expect the startup ecosystem to normalize in 2024.
74% of founders are optimistic about their startups’ outlook.
The last two years have been harsh on startups and funding rounds; if you also consider the current economic environment, founders will have to tackle a lot more challenges and issues.
Despite that, most founders have a positive outlook. The study found that 58% of founders were optimistic while 16% were very optimistic.
18% were neutral, 7% were pessimistic, and only 1% were extremely pessimistic. If you ask me, it’s quite impressive that only 8% of founders think their startup is in trouble.
You might have heard how 9 out of 10 startups fail and that paints a different picture here.
But, the truth is, that 9 out of 10 saying is not new; it’s two decades old at least, maybe older.
Also, that saying is more about how one in ten startups is super successful.
- 3 startups completely fail by either going bankrupt or closing down permanently.
- 3 startups are performing below average with low profitability and a bad ROI, but are active.
- 3 startups are performing average, are profitable, and break even, but have not been acquired, yet they are active.
- 1 startup is highly successful, providing an extremely high return on investment, and is a target for acquisition or an IPO.
However, it still holds to some level. According to Crunchbase, 3,814 startups were founded in 2023.
Meanwhile, a New York Times report found that 3,200 startups failed in 2023. That’s an 84% failure rate in general.
That said, these numbers are for startups with venture capital, not bootstrapped businesses.
77% of startups are not expecting layoffs this year.
If you’re following major publications, there has been an uptick in articles about mass layoffs and how it will affect every company, especially startups.
CNBC recently reported that layoffs are their highest since 2009. However, at the same time, 57% of startups say that layoffs are extremely unlikely while 20% say they’re somewhat unlikely.
13% were neutral, 6% said it was somewhat likely, while 4% of startups said that layoffs are extremely likely this year.
There is an explanation I can give for this. Pilot’s study also found that startups with less than 10 full-time employees are 34% less likely to consider layoffs than those with 11-50 FTEs.
Therefore, looking at it as a whole, with thousands of startups, most don’t have a lot of FTEs so they wouldn’t expect layoffs.
However, the 10% that do are possibly larger startups with tens, even hundreds of employees.
Not to mention, the current industry practice is to make layoffs large so you don’t have to do them repeatedly.
That ends up making those 10% startups account for a large number of layoffs.
There has been a 40% decline in global unicorns.
A unicorn is any privately held startup with a value of over $1 billion. The total number of unicorns produced each year has been decreasing since 2021.
For example, there were 595 unicorns in 2021 while that number dropped to 359 in 2022.
Asia and North America’s share of unicorns has declined the most.
Wrap Up
Startups have always had an average 90% failure rate and most studies in various parts of the world find that to be accurate. But the word itself isn’t what you think it means.
Startup failure simply refers to the business not being profitable. It doesn’t necessarily mean that the startup has shut down.
In more cases than I can count, eventually, investors grow tired and stop funding a startup which becomes the reason for the actual failure.
What’s funny is that in business school, you’re taught that if a business isn’t profitable in the first year, you’ve already failed.
By that definition, more than 99% of startups have already failed.
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