The startup world is known for its high-risk, high-reward nature. For every household name like Uber, Airbnb, or Stripe that successfully scales into a billion-dollar enterprise, countless others fail—sometimes spectacularly. Despite massive funding, media hype, and seemingly visionary founders, many startups fail, leaving investors questioning what went wrong. In this blog, learn more about why startups fail, examples of failed startups, and how investors may be able to fail forward by learning from failed startups.

What Investors Can Learn from Failed Startups

Why Startups Fail

Market Misalignment

While every failed startup has its own story, most share common themes. A striking 28% of startup failures occur because the product or service does not address a real market need. This is often the result of startups focusing on building a solution without fully validating the problem they aim to solve. They may rely on anecdotal evidence rather than comprehensive market research, leading to products that are either unnecessary or misaligned with customer expectations.[1]

Timing also can play an important role when it comes to market misalignment. Some startups may introduce their solution too early when the market is not ready for it, or they could wait too long to introduce it and struggle because someone else has already released a similar solution, creating competition.

Financial Mismanagement

Another common reason startups fail is because they burn through money too quickly and run out of runway well before becoming profitable. The problem can worsen when there’s an over-reliance on investor funding instead of focusing on achieving and sustaining profitability. Financial mismanagement can quickly sink even the most promising company.

Leadership and Team Issues

A strong founding team can be the difference between success and failure. Disputes between co-founders, poor leadership decisions, or an inability to pivot when needed can create issues within the start-up. Investors should assess not just the idea but also the people leading it, ensuring they have the resilience and expertise to navigate challenges.

Rapid Scaling or Failing to Scale

Despite having a great product or service, many startups find it challenging to meet sudden increases in demand or scale accordingly. This usually happens due to one or more of the following reasons:

• Supply chain issues, e.g., suppliers can’t ship products to customers on time.
• Tech limitations, e.g., a sudden spike in traffic forces the company’s app to crash.
• Poor infrastructure, e.g., a company doesn’t upgrade its facilities to accommodate growth. For instance, it lacks the space to hire more customer support staff that can handle an increasing number of queries, leading to customer dissatisfaction and lost sales.

Regulatory and Legal Challenges

When ignored, regulatory requirements can result in significant fines and penalties for startups already strapped for cash. Couple this with the ever-present IP threat (competitors stealing your intellectual property such as logos, trademarks, and copyrights), and a startup may find itself facing challenges.

Examples of Failed Startups

Quibi

Quibi, a short-form streaming platform backed by nearly $2 billion in funding, launched in 2020 to redefine how people consume video content on mobile devices. However, despite its high-profile leadership, Quibi failed to gain traction. Consumers weren’t interested in paying for short-form content when free alternatives like TikTok and YouTube dominated the space.

The app also launched when people were sheltering in place due to the pandemic , and the content available was mediocre and low quality. At a time when people were stuck at home looking for things to watch, consumers sought out other platforms for better content. Within six months, Quibi announced its shutdown, proving that even deep pockets and star-studded leadership can’t compensate for market misalignment and financial mismanagement.[2]

FTX

FTX was once one of the largest cryptocurrency exchanges, led by Sam Bankman-Fried, a founder praised as a financial genius. The company attracted billions in investments from top-tier firms, but its collapse in 2022 revealed massive fraud, misuse of customer funds, and poor corporate governance. Many investors, caught up in the hype surrounding crypto, overlooked critical warning signs such as the lack of transparency in financial reporting.

FTX’s downfall serves as a stark reminder that no matter how revolutionary a business appears, due diligence is essential. Investors should always assess financial controls, regulatory compliance, and governance before backing any startup, particularly in emerging industries.[3]

WeWork

WeWork started as a promising flexible office space provider but became a cautionary tale of reckless expansion and overinflated valuations. Investors eager to get in on the next big thing ignored red flags such as massive losses, an unsustainable business model, and eccentric leadership from founder Adam Neumann, leading to its failure due to leadership and team issues.

The company’s IPO attempt in 2019 exposed financial weaknesses and questionable governance practices, causing its valuation to plummet from $47 billion to near bankruptcy. One takeaway from this company is that investors need to scrutinize financials, question valuations, and ensure that a startup’s leadership is capable of building a sustainable business rather than selling a vision detached from reality. A single WeWork stock was worth $520 two years ago. Today, it’s around $0.40.[4]

Jawbone

Jawbone started as a pioneer in Bluetooth headsets and later expanded into wireless speakers and fitness wearables, raising nearly $1 billion in funding. Despite the early success, the company struggled with scaling due to manufacturing delays, supply chain issues, and product defects. Aside from the scaling challenges, Jawbone was also having to compete with Fitbit and Apple and was struggling to retain customers.[5]

The company burned cash aggressively on marketing while failing to refine its products, leading to massive financial instability. Ultimately, Jawbone’s inability to manage inventory, differentiate its products, and transition into the correct industry led to its downfall, and ultimately shut down in 2017. One takeaway from this startup is that investors should prioritize startups with strong operational infrastructure and sustainable growth strategies rather than those that rely on aggressive marketing that may mask underlying inefficiencies.

Theranos

Theranos, once valued at over $9 billion, promised to revolutionize healthcare with its proprietary blood-testing technology, claiming it could run hundreds of tests with just a few drops of blood. Investors, including high-profile names like Rupert Murdoch and the Walton family, poured money into the company without demanding rigorous proof of its technology.

The downfall came when investigative journalism exposed that Theranos’ technology never worked as promised. The company relied on traditional blood-testing machines while misleading regulators and investors, consequently falling into regulatory and legal challenges. Due to the amount of money involved and the subsequent impact on the healthcare industry, Theranos is also regarded as one the biggest tech startup failures in history.[6]

What Investors Can Learn from Failed Startups

Revenue growth alone isn’t a success metric. Investors should examine a startup’s unit economics—customer acquisition cost, lifetime value, and profit margins. A business that scales without a sustainable revenue model could cause future issues for the company. Additionally, a compelling pitch deck isn’t enough. Investors may want to dig deeper—conducting customer interviews, reviewing financial records, and evaluating technology claims.

Even a great idea can fail if the market isn’t ready. Investors should assess whether external factors—consumer behavior, technology adoption, and regulatory conditions—align with the startup’s vision. If something seems too good to be true, there’s a good chance it is too good to be true.

How Investors May Be Able to Fail Forward

Investors should be able to learn from past mistakes, both their own and those of others. By analyzing reports of failed startups, investors can refine their approach, and learn to avoid common pitfalls when it comes to investing in the private market. Patterns of failure often repeat. Whether it’s unsustainable customer acquisition costs, overreliance on venture funding, or a lack of market validation, these mistakes tend to surface again and again. Investors who actively track and categorize these patterns may be able to develop a more systematic approach to identifying risky ventures.

Learning From VCs

Some of the most well-known VC firms have adapted their investment strategies with lessons from failed startups. Firms like Sequoia Capital and Andreessen Horowitz, for example, have become more selective with late-stage investments after witnessing high-profile collapses due to unsustainable growth.

Additionally, firms are increasingly focusing on founder resilience and adaptability as key investment criteria. Investors have realized that startups often pivot multiple times before finding success, so backing founders who can navigate uncertainty can be just as important as backing great ideas.

Final Thoughts

Failed startups are learning opportunities. Each high-profile collapse, from Theranos to WeWork, can provide valuable insights into what can go wrong in the private market. Whether it’s poor leadership, flawed business models, or unsustainable growth, these failures remind investors that high valuations and short-term hype don’t always equate to long-term success.

Want to learn more about investing in startups? Check out the following blogs to learn more:

• Investing in Startups – Things to Know Before You Invest
• Navigating the Risks: Why Startups Fail
• Investing Pre-Revenue: Navigating the Uncharted Waters of Startups
• How to Get Into Private Equity

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

 

[1] https://www.bsl-lausanne.ch/blog/why-startups-fail-a-deep-dive-into-the-real-reasons-behind-the-collapse-of-new-ventures/

[2] https://www.theverge.com/2020/10/22/21528404/quibi-shut-down-cost-subscribers-content-tv-movies-katzenberg-whitman-tiktok-netflix

[3] https://www.investopedia.com/what-went-wrong-with-ftx-6828447

[4] https://simpleclosure.com/blog/posts/big-startup-failures/

[5] https://www.forbes.com/sites/maryjuetten/2019/02/05/failed-startups-jawbone/

[6] https://simpleclosure.com/blog/posts/big-startup-failures/

*****

The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.