6 Overlooked Reasons Why Startups Fail and How to Avoid Them

Startups fail.

And will fail again 90% of the time because success doesn't always come after failure, even though we believe it does.

Why?

According to a study published by the American Psychological Association, founders "ought to pay attention and learn from failure, but often they don’t because failure is demotivating and ego-threatening”, said lead researcher Lauren Eskreis-Winkler, PhD, an assistant professor of management and organizations at Northwestern University.

As a founder and chief product manager, which is better: to 'fail fast and fail often' or 'succeed fast and succeed often'?

While many discussions on startup failures focus on common issues like lack of market need or running out of cash, several critical factors go unnoticed.

Let's consider these 6 overlooked reasons startups fail with examples, and strategies to navigate them to succeed fast.​

No one reason outweighs the other. Each reason impacts startups differently.

1. Overrating Investor Feedback and Ignoring Customer Feedback

Most founders in trying to avoid the 'running out of cash' problem tend to go into investor-pleasing mode.

You'd think that listening to customer feedback should please investors but in practice, those two things do not always align.

Investors may want a product to go in a certain direction and customers may want the opposite.

The problem is both provide funding, either as capital or revenue.

Listening to investors and expanding rapidly like Webvan, an online grocery delivery service without adequately addressing customer feedback regarding service quality and delivery reliability leads to failure.

Also, assuming market demand because investors say so without thorough research leads to launching products that have no real market.​

For instance, Juicero developed an expensive juicing machine without validating whether consumers would be willing to pay for such a product. The market's rejection led to the company's closure.

So paying attention to paying customers' feedback is as important as listening to investors.

Systematically collecting and acting on customer feedback solves both market research and the right product positioning problems.

For example, see how True Ranker is using Feedbear to collect customer feedback and drive growth.

2. Poor Financial Management

Cash flow problems are a leading cause of startup deaths. Many founders underestimate costs, overestimate revenue, or fail to secure enough funding.

While failing to secure enough funding may seem outside the founder's control, missteps such as overspending, inadequate budgeting, and deceptive financial practices aren't. And they rapidly deplete resources, erode investor confidence, and lead to legal complications.

The Theranos case, once a Silicon Valley darling, serves as a cautionary tale of financial mismanagement intertwined with fraudulent practices.

The company attracted over $700 million in investments, reaching a valuation of $9 billion.

However, investigations revealed that Theranos misrepresented its technological capabilities and financial health, leading to charges of fraud.

The company dissolved in 2018, and Holmes was later convicted and sentenced to prison for wire fraud and conspiracy.

Another example is Synapse Financial Technologies, a banking-as-a-service company, that filed for Chapter 11 bankruptcy in April 2024.

Despite backing from prominent investors like Andreessen Horowitz, Synapse faced a shortfall between its records and those of its banking partners, estimated at $65 million to $96 million.

This discrepancy led to a loss of access to funds for tens of thousands of businesses and consumers.

What should you do differently?

• Establish Transparent Financial Practices - Maintain honesty in financial reporting to build trust with investors and stakeholders.​
• Regularly Monitor Cash Flow - Implement accounting systems to track income and expenses to ensure liquidity and operational stability.​
• Develop Clear Budgeting Processes - Create detailed budgets that align with strategic goals for informed decision-making and resource allocation.​
• Secure Adequate Funding - Plan funding rounds to meet growth milestones without overextending financial commitments.​
• Implement Internal Controls - Establish checks and balances to prevent fraud and ensure compliance with financial regulations.

3. Weak Leadership and Team Dynamics

Leadership sets the vision and direction of a startup, while team dynamics influence how effectively that vision is executed.

For example, IronNet, a cybersecurity firm founded by former NSA director Keith Alexander, serves as a cautionary tale of how leadership shortcomings precipitate a startup's downfall.

Despite a high-profile team and initial success, IronNet faced these challenges:

• The company was accused of overpromising its capabilities and failing to maintain transparency with investors and partners, leading to a loss of confidence. ​
• Former executives criticized the company's management, likening its culture to that of Theranos, a notorious example of corporate fraud.

Poor leadership results in unclear objectives, inconsistent strategies, and a lack of accountability.

Similarly, dysfunctional team dynamics—such as lack of trust, poor communication, and unresolved conflicts—hinder collaboration and innovation.

Collectively, these issues derail a startup's progress and diminish its chances of success.

Studies have shown that poor management and people's problems contribute to a high number of startup failures

How to lead and build a better team?

Don't be in a hurry to leave founder mode.

Encourage leaders to engage in ongoing education and mentorship to enhance their management capabilities.

Establish channels for honest and open communication within the organization to build trust and facilitate problem-solving.

Implement regular feedback loops where team members can share insights and concerns without fear of retribution.

Clearly outline each team member's roles and responsibilities to prevent overlaps and gaps in accountability.

4. Failing to Compete

You're at war.

Especially in the tech industry, where barriers to entry are low and innovation is rapid, understanding the competitive environment is essential for differentiation and survival.

For example, Quibi, a short-form video streaming platform, launched in 2020 with substantial investment ($1.75 billion) but shut down after just six months.

The company underestimated competitors like TikTok and YouTube, which already dominated the short-form content space.

Quibi's failure highlights the importance of assessing the competitive environment and understanding user preferences before entering a saturated market.

For example, Quibi, a short-form video streaming platform, launched in 2020 with substantial investment ($1.75 billion) but shut down after just six months.

The company underestimated competitors like TikTok and YouTube, which already dominated the short-form content space.

Quibi's failure highlights the importance of assessing the competitive environment and understanding user preferences before entering a saturated market.

To compete effectively you must analyze your competitors.

Competitive analysis involves evaluating the strengths and weaknesses of current and potential competitors.

This means understanding:​

• Market Positioning - Identifying where your product stands relative to others in terms of features, pricing, and target audience.​
• Customer Expectations - Recognizing the standards set by competitors that influence what customers expect.​
• Emerging Trends - Staying informed about technological advancements and market shifts that could impact your business model.

To avoid the pitfalls experienced by Quibi even after receiving large investments you need to:

• Conduct thorough market research - List direct and indirect competitors to understand the landscape.​ Evaluate their features, pricing, customer reviews, and market positioning.​
• Engage with Customers - Understand why customers choose certain products and what they feel is lacking by collecting and acting on feedback.​ Also, identify if customers are leaving for competitors and why.​
• Stay agile and adaptive - Keep abreast of technological advancements and changing customer needs.​ Adjust your product or strategy in response to new information about the competitive landscape.​
• Differentiate your product - Clearly articulate what sets your product apart from competitors.​ Regularly update and enhance your product based on competitive insights and customer feedback.

5. Ineffective Marketing

A great product won’t sell itself. Many startups fail because they don’t invest enough in branding, outreach, or sales strategies.

Plenty Unlimited Inc., a vertical farming company that, despite securing nearly $1 billion in funding from prominent investors like Jeff Bezos and SoftBank, filed for Chapter 11 bankruptcy in March 2025.

Plenty's inability to effectively market its products and secure a robust customer base contributed to its downfall.

We are seeing startups with innovative solutions also fail due to inadequate marketing.

To mitigate such risks, startups must develop comprehensive marketing plans that clearly communicate their value propositions to target audiences.

This involves understanding customer needs, differentiating from competitors, and effectively conveying how the product or service addresses specific pain points.

Implementing data-driven marketing strategies, leveraging digital channels, and continuously assessing and refining approaches based on market feedback are crucial steps toward ensuring a startup's success.

6. Premature scaling

Approximately 74% of startups fail due to premature scaling

Premature scaling occurs when a startup accelerates aspects of its business—such as team expansion, customer acquisition, or product development—without achieving product-market fit or establishing sustainable operations.

Forward, a healthcare startup founded by former Google and Uber executives, aimed to revolutionize primary care with advanced AI-driven "CarePods."

Despite raising over $650 million, the company faced frequent technical failures, logistical hardships, and low user adoption.

Automated blood draws often failed, and patients struggled to operate the pods. Financial strain and slower-than-expected growth led to layoffs and, eventually, the abrupt closure of all Forward’s locations in November 2024.

How to avoid premature scaling?

1. Ensure that the product or service effectively meets a validated market need before pursuing expansion.​
2. Establish clear revenue streams and operational efficiencies to support growth initiatives.​
3. Use data-driven insights to assess readiness for scaling, focusing on metrics like customer acquisition cost and lifetime value.​
4. Adopt a phased approach to expansion, allowing for adjustments based on performance and feedback.

Final thoughts

Startups fail for many reasons, but the biggest mistakes are often preventable.

Addressing these often-overlooked factors is crucial for startups aiming for longevity and success.

Learning from others’ failures—especially the mistake of ignoring feedback—you can build smarter, pivot faster, and increase your chances of success.

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