When a start-up goes bankrupt: the 5 reasons behind the failure

— Other — 3 minutes read

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In the entrepreneurial world, every start-up, hopes to become successful. Unfortunately, in reality, some start-ups face financial difficulties and sometimes have to put an end to their project.

Although you can find official statistics on the start-up bankruptcy rates in some countries, "there is no precise information on the rate of survival of Belgian start-ups, but it is certain that only a small part succeeds in turning into scale-ups".

What are the reasons why start-ups find themselves in trouble and end up bankrupt? At the beginning of February, CB insights, a company that gathers and analyses data to improve companies' strategies, published an article listing the 20 reasons why a start-up fail. On the basis of this article, here are five of these reasons, gathered under three aspects: product, finances and management.

Having analysed only 101 start-ups, it is important to stress that every case is specific and that we cannot generalise these reasons to every start-up.

The product
The product aspect is the one that dominates this list, especially because in 42 % of cases, the absence of the product-market fit is the number one cause of bankruptcy. Many start-ups favour the interesting and unique aspect of their product, sometimes forgetting that if the consumers do not need this product, this one will not be bought.
Another cause of bankruptcy (in 19 % of cases) is the high competitiveness of the market. If having some competition is completely normal, to have too many competitors for the same product or several new comers at the same time does not ease the situation.

Financials
Running out of money is the second reason mentioned by entrepreneurs to explain their bankruptcy. Money remains the sinews of war and a bad management of your financial resources can quickly put your organisation in danger, whatever its size. Which is why it is important to establish a good business plan, and to follow through with it as much as possible.

Management
The study of CB insight listed in the third position the fact of having the wrong team as the reason of the failure for 23% of the start-ups. Not having certain skills within the team, to have a bad atmosphere between certain members, are elements which can put a strain on a start-up. The "non-complementarity between the partners of the management team" is also quoted as a cause of bankruptcy by Cédric Donck business angel in the Belgian market.

The second aspect regarding management is having a poor marketing strategy (14% of the questioned start-ups). Not to establish a marketing strategy or not to take advantage of the marketing tools, is to put the company at risk, which for some, is sometimes fatal.

Conclusion: never a failure, always a lesson
Even if all this can be frightening, it is important to specify that most of the companies do not disappear following a bankruptcy; they can be taken over by somebody else, be put on pause before relaunching, be bought back, etc. The most important, even if it is sometimes difficult, is to analyse the reasons of the failure and to learn lessons from it; entrepreneurs can always launch other projects and benefit from previous experiences.

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