Adam Smith Institute

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Startups fail for the same reason markets succeed

In the current jargon a unicorn is a private company, usually venture capital backed, which has a valuation above $1 billion. They are what everyone wants to create, what all lust after investing in. However, it's also interesting to look at what happens at the other end of that success scale:

It’s a common adage in Silicon Valley that 90% of startups ultimately fail. To understand why that’s the case, a pair of researchers meticulously pored over 193 blog posts—startup postmortems, if you will—written by founders examining what went wrong.
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But taken as a whole, the insights from the research project are intriguing. For the failed startups analyzed in this study, the factor most often cited by founders, even more often than running out of cash, was that their business models weren’t viable.

It's not obviously true that we wish such adventures to fail. But that reason so many of them do fail is precisely and exactly why markets work so well in making us all immensely richer over time.

Times change: technology changes, desires change, fashions do. At any one time there's a certain technological space therefore and that shape and size of that space changes with the passing moments. We thus want some system of sorting through the possibilities to see which do in fact add value. Which options take scarce resources at their current prices and then add value to them, that added value being what we call making us all richer? 

Well, another name for finding something that does ad such value is finding a viable business model. For if you are adding value to those resources then you're making a profit. Which is indeed what we generally describe as a viable business.

Any such system of sorting through the possibilities must have a method of rejecting those that don't add value: we might also terms this as closing down those experiments which don't have a viable business model.

That is, exactly how those failing start ups fail, by not having that viable business model, is precisely how the system of market experimentation makes us all richer. Because we're exploring all the new opportunities of the greater technological space and rejecting those that don't add value.