Why do companies fail? Considering how important this question is to entrepreneurs, investors, and even society as whole, I can find little widely available research into it. If we understood the answer better, less capital would be misallocated and fewer lives wasted by founders in pursuing doomed schemes.
I think start-ups and established businesses typically fold for different reasons. CB Insights published a fascinating study of 101 Silicon Valley postmortems based on submissions from the individual founders, analysing the various reasons for closure. Easily the single biggest cause was a lack of sales. After all, without revenue, every company is bust. This is stating the obvious — but it is extraordinary how many entrepreneurs overestimate the market for their idea. The second biggest explanation was a lack of money — but often I suspect this is a result of other problems. The third was a bad management team. Other factors cited included too much competition, low margins, poor customer service and an uncommercial business model.
I can confirm that a combination of these played a part with every early stage venture I’ve backed which flopped. I was surprised that more Silicon Valley founders didn’t acknowledge flawed technology as a contributor to the demise of their project. All the risks can never all be correctly identified before launching a business; and of course there are usually multiple reasons why a business shuts down. But no corporate death is identical to another — each is a unique tragedy, normally a blend of poor luck and rotten judgment.