Don't rush to raise financing for expansion, first find out how these 6 types of companies went out of business.

Startup failure is inevitable. Few well-known companies can claim to have never experienced it. Every failed product or company comes with costs: wasted resources, lost jobs, and damaged reputation. But failure can also be beneficial. Learning lessons from past failures helps build a lasting business. Just stay alert to the factors that could derail your venture.

Founders strive to build their startups, while venture capitalists work to identify and invest in the most promising projects. However, the harsh reality is that failure is unavoidable. Latest data shows that the closure rate of U.S. startups has risen by 60% over the past year.

Numerous factors can lead a company or product to fail. To better understand risk-taking and failure, I have collected and curated artifacts related to more than 1,000 failed products and businesses, such as the Pets.com sock puppet, unopened cans of New Coke, and Google Glass. I call my collection the "Museum of Failure".

While researching my collection, I found that almost all failures fall into six categories, which I refer to as "the six factors of failure". I strongly advise founders and executives to look for warning signs before these factors cause disaster for their businesses.

The Six Factors of Startup Failure

1. Product-market misalignment

At the end of the day, all failed products share one thing in common: few customers find a compelling reason to buy them. It could be a pricing issue, a problem with product features, the fact that it is a nice-to-have rather than a must-have, or simply that it is not the product people expect from that company.

Harley-Davidson had a stellar reputation in its core motorcycle business, but when it launched a cologne and entered a highly competitive market dominated by top designer brands like Armani, Calvin Klein, and Versace, the product flopped. The same fate befell the whimsical product attempts of Burger King (which also launched a cologne) and Cheetos (lip balm and eye shadow).

If companies invest heavily in manufacturing, distribution, marketing, and sales before identifying a potentially strong connection between potential buyers and the product's value proposition, they can find themselves in serious trouble. There is a proverb that describes this situation: having a solution with no problem to solve.

2. Poor financial management

The reason most companies fail is simple: they run out of money. Excessive debt, lax spending controls, exorbitant customer acquisition costs, or over-reliance on a single revenue stream or customer — these are just a few of the warning signs that a business may burn through its capital before it even takes off.

Webvan, an early online grocery delivery service, launched in 10 cities and raised $757 million before proving its model was viable in even one market. Its business model centered on building and operating its own distribution centers and hiring dedicated drivers, an approach that required massive amounts of capital to keep the company running.

Home goods retailer Bed Bath & Beyond had more than 1,500 stores in 2018, but instead of using cash flow to invest in its business, the company spent $11.8 billion on share buybacks since 2004, eventually declaring bankruptcy in 2023.

In some cases, the cost of acquiring and retaining customers is so high that the lifetime value of the customers cannot cover these investments. Companies that expand product lines or enter new market segments through acquisitions often pay exorbitant prices but reap very little. For example, computer manufacturer Compaq acquired Digital Equipment Corporation (DEC) in 1998, one of the largest mergers in the computer industry at that time. Compaq hoped to expand its global reach by acquiring DEC's overseas operations. However, the two companies never fully integrated, and Compaq was eventually acquired by Hewlett-Packard in 2002 due to financial difficulties.

3. Neglecting customer value

Strong brands are built when companies create positive value experiences for their customers. If a business fails to understand what "value realization" means in the minds of its customers, it undermines its ability to achieve long-term customer satisfaction. Even loyal customers can become dissatisfied due to issues such as incomplete product features, poor quality, inadequate customer support, and low cost-effectiveness.

Apple's Newton was a pioneer in the handheld computing device market, with many features — such as handwriting recognition and calendar management — that were revolutionary for mobile devices in 1993. But the company rushed it to market, and its ability to accurately capture user handwriting fell far short of expectations. Its shortcomings turned it into a laughingstock, most famously in the *Doonesbury* comic strip and *The Simpsons*. Customers were used to paying premium prices for Apple products, but the Newton failed to deliver the expected value.

Samsung's Galaxy Note 7, packed with features and priced high, was praised for its build quality, HDR support, and smooth user interface when it launched in 2016. However, within a year of its release, 2.5 million Note 7 units were recalled after customers reported batteries overheating and even catching fire.

4. Excessive competition

No matter how innovative an organization is, every company or product faces competition. The key lies in how to respond to it. Trying to win over the loyal customer base of a competitor is a daunting challenge. On the other hand, complacent industry giants may fail to keep pace with innovators and lose the markets they once dominated, especially in technology-intensive sectors.

Technology that is disruptive today may become obsolete tomorrow. Threats can come from multiple directions, such as competitors expanding their market reach up or down the value chain, or an especially aggressive rival draining your resources. (This threat is particularly pronounced in businesses that rely heavily on intellectual property.)

Think about MySpace. For a period of time, it defined social media, and at its peak in 2006, it briefly became the most visited website in the United States. But it failed to innovate and keep up with the rapidly changing habits of young users, and was soon left far behind by Facebook — a gap it could never close. General Motors (GM), the largest U.S. automaker, invested more than $10 billion in its autonomous taxi service Cruise. When Cruise launched in 2016, the development of self-driving taxis was the company's top priority. However, Cruise could not keep up with competitors like Waymo and Tesla, and repeated safety incidents involving the Cruise fleet brought the company into conflict with regulators. GM finally shut down its autonomous taxi development division in 2024, ending the loss-making Cruise business.

5. Poor timing

Unforeseen changes in the macroeconomy, technology, international affairs, or market dynamics can deal a fatal blow to a product and its manufacturer. New taxes or tariffs can undermine financial projections and customer acceptance. If a new technology requires supporting physical infrastructure or a large ecosystem of partners, its rollout can be extremely slow.

But sometimes poor timing — entering the market too early or too late — can be self-inflicted trouble. Catching the wave of a hot market can make fundraising easy, but once the wave recedes, the next round of financing can become difficult.

Another example is that success in one market does not guarantee victory in others, such as Amazon's Fire Phone. For years, there were rumors that Amazon was developing a phone, so expectations were high when it launched in June 2014. Despite some technical innovations and a competitive price, it hit the market seven years after the iPhone and six years after the first Android phone. Unsurprisingly, Amazon's device never caught on and was discontinued a year later.

In a sense, the timing of UK virtual events startup Hopin could not have been better. Founded the year before the COVID-19 pandemic, Hopin saw its platform adoption surge as travel restrictions and social distancing requirements made in-person events impossible. After reaching a peak valuation of $7.8 billion in 2021, demand declined as people returned to in-person events. Hopin went through three rounds of layoffs and eventually sold its core business to RingCentral for $15 million in 2023.

6. Weak leadership team

Recruiting, retaining, and motivating talent is an endless task, not to mention integrating individuals into a cohesive and efficient team. Dysfunction at the top can quickly spread throughout the organization and demoralize the workforce.

Theranos and Enron are classic examples of weak, unethical leadership teams that led their companies to infamous endings. Enron concealed huge debts and toxic assets from regulators and investors, while Theranos put patient health at risk and defrauded its investors. In both cases, the unconstrained behavior of the leadership was a failure of the board responsible for governance and oversight.

Of course, these two companies could also serve as examples of a seventh factor: outright fraud, which is very difficult to detect at the beginning. Think about Bernie Madoff's Ponzi scheme.

Learning Lessons from Failure

What can founders do to avoid — or at least learn from failure?

1. Focus on business fundamentals

The past few years have been tough for startups, and capital has sometimes been scarce. As a result, capital efficiency is critical. Companies should not enter the market without clear product-market fit.

Take the ESPN phone as an example, which was discontinued shortly after its launch in 2006. It only displayed sports scores and ESPN content. This made it a nice-to-have item, not a necessity, even for the most diehard sports fans.

2. Build a world-class team

Founders should surround themselves with a strong, experienced, and engaged management team, board of directors, and investors. Take WeWork as an example, where the board failed to detect a culture of overspending and enforce financial discipline.

3. Make customer value realization a top priority

Regardless of the industry, the success of young companies depends heavily on high satisfaction among early customers. Choose representative early customers who reflect the larger market you are trying to serve, and always seek and listen to their feedback.

The management of electric vehicle manufacturer Fisker would have done well to listen to its early owners, who were frustrated by frequent software and component issues that led to constant, complex repairs.

4. Stay open-minded and adaptable

Even the most successful companies have gone through at least one transformation. Staying open-minded and flexible in the face of changes and challenges is crucial.

A textbook example of a company that failed to transform successfully is Blockbuster, which once had more than 9,000 stores and dominated the movie rental market. After missing the opportunity to acquire a young startup called Netflix, it eventually succumbed to the market's shift to streaming entertainment and filed for bankruptcy in 2010.

The Value of Failure

Browsing the exhibits of the Museum of Failure may bring a smile to your face, but it is a serious subject. Every failed product or company comes with costs: wasted resources, lost jobs, and damaged reputation.

But remember, failure can also be beneficial. Few well-known companies can claim to have never experienced failure. In fact, a lack of failure may indicate a lack of creativity and conviction, or a fear of taking risks.

Learning lessons from past failures helps build a lasting business. Just stay alert to the factors that could derail your venture.

Keywords: #Startup

Sean Jacobsohn | Article

Sean Jacobsohn is a Partner at Norwest Venture Partners, a venture and growth equity investment firm, focusing on early to late-stage investment opportunities in the enterprise cloud sector. As the founder, chief historian, and collector of the "Museum of Failure", he has curated physical artifacts from failed companies and products, and documented his learning. He also founded the Harvard Business School Alumni Angels, the world's largest university-affiliated angel investment group.

Zhou Qiang | Editor

This article is from the WeChat Official Account "Harvard Business Review" (ID: hbrchinese), authored by HBR-China, and republished by 36Kr with authorization.