Launching a new business is exhilarating, but it can also be daunting, and the uncomfortable truth is that the majority of startups don’t survive beyond their third year. Understanding exactly why startups fail is crucial if you’re aiming to beat the odds and build something lasting.
While most founders pour energy into plans for success, fewer take the time to analyse potential paths to failure. That’s where a pre-mortem analysis comes in. Instead of waiting for setbacks to happen, a pre-mortem prompts you to vividly imagine your business has already failed, then methodically work backwards to identify and mitigate those hidden risks.
This proactive approach gives you the clarity to anticipate problems before they happen, making your business strategy far more robust.
In this guide, we’ll walk you through conducting your own pre-mortem analysis, exploring the common pitfalls and challenges startups face, and providing you with actionable strategies to transform potential weaknesses into strengths—setting your business up for sustainable success.
Key Takeaways
- Most businesses fail due to cash problems, poor planning, and strong competition.
- A pre-mortem analysis helps teams anticipate specific failure scenarios and make proactive, strategic decisions to mitigate them.
- Prioritising risks by likelihood and impact ensures resources allow you to target the most urgent concerns.
Why do businesses fail?
The failure rate among startups is staggering. PwC’s analysis of UK startup insolvency rates sheds light on new businesses failing and how widespread the risk really is.
The chart below compares 10 years of startup (less than 7 years old) versus non-startup (more than 7 years old) insolvency rates.
On average, 60% of UK startups failed over the past decade. In 2024, startup insolvencies fell below 50% for the first time since 2014. Despite this improvement, the data shows that nearly half of new businesses still don’t make it past the early years, underscoring the need for effective startup risk management.
What are the reasons behind this data? Let’s explore the common patterns among failed businesses to help you avoid them.
Top 5 reasons why businesses fail
Consistent themes appear across failed ventures. According to a report from CB Insights, a business analytics and market intelligence platform, these five failure factors highlight why business planning and early startup risk management, including a pre-mortem analysis, are so crucial.
Author's Tip
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Other warning signs to watch for
Businesses don’t typically fail overnight. Beyond these primary causes, here are early warning signs worth monitoring:
- Dismissing customer feedback – Not listening to your audience can lead to missed market opportunities or product irrelevance, stalling growth.
- Unclear value proposition – If customers can’t quickly understand how you solve their problem differently, they’ll likely choose a competitor.
- Undifferentiated offerings – Lacking a unique selling point (USP) makes it difficult to attract and retain loyal customers.
- Operational inefficiencies – Slowdowns in internal processes can drain time and capital.
These signals often indicate strategic or operational risks, so mitigating them early supports long-term resilience for your business.
Defining pre-mortem analysis and why your startup needs one
A pre-mortem analysis takes a different approach to traditional risk planning by looking at problems before they happen. Instead of reviewing what went wrong after failure (this would be a post-mortem), you imagine your business has failed and work backwards to prevent it.
This approach helps you spot weaknesses in your model, team, or strategy early, before they turn into costly crises.
Graeme Donnelly, CEO and Founder at Quality Company Formations, advises:
Understanding and analysing risk is about avoiding pitfalls and proactively guiding your startup toward sustainable growth.
By thoroughly examining how internal challenges and external forces might impact your business, founders gain crucial insights that lead to better decisions, fewer costly mistakes, and ultimately, greater resilience and success.
Benefits of using a pre-mortem analysis in startup risk management
Incorporating a pre-mortem analysis into your early planning processes can help you:
- Identify overlooked problems
- Strengthen critical thinking and assess challenges more rigorously
- Create shared ownership of risks and solutions across your company’s founding team
By combining these benefits, a pre-mortem analysis helps build a stronger foundation for long-term startup growth.
How it differs from other risk management tools
Unlike a SWOT (strengths, weaknesses, opportunities, and threats) analysis or project management checklist, a pre-mortem involves assessing what could go wrong in a more creative way by encouraging open-ended thinking about potential failures that have yet to occur.
It also encourages you to be honest rather than glossing over or downplaying mistakes after they’ve already happened.
How a pre-mortem analysis could work in a real-world startup
Imagine you’re setting up a tech company. In your pre-mortem session, the team envisions failure due to low conversion rates or a security breach.
In response, you adjust your pricing strategy and tighten data compliance processes before officially launching the business. As a result, you’ve just avoided fatal missteps and aligned your team around proactive, risk-aware decision-making.
How to run a pre-mortem: A step-by-step process
Follow these six structured steps to conduct your startup’s first pre-mortem analysis effectively. This proactive approach will significantly reduce the risk of business failure.
1. Set the scene
Organise a focused meeting and present this key scenario to your team: “Imagine it’s 18 months from now. Our startup has failed completely. What went wrong?”
As a founder, optimism comes naturally, but for this exercise, allow yourself and your team to realistically imagine worst-case scenarios. This exercise is about uncovering hidden vulnerabilities, not about maintaining optimism.
2. Assemble a diverse team
Include team members from various departments – marketing, product development, finance, operations – as well as advisors, mentors, and co-founders. This diversity ensures a broader range of perspectives and helps surface insights you might otherwise overlook.
3. Brainstorm potential reasons for failure
Create a safe and non-judgemental space that encourages openness and honesty. Record all comments, even those that seem minor or unlikely at first glance. Some potential reasons you might uncover include:
- Poor market validation
- Leadership disagreements or communication breakdowns
- Cybersecurity threats
- Regulatory non-compliance (e.g., GDPR or industry-specific standards)
- Cash flow shortages
- Technical challenges or product development delays
Encourage detailed and comprehensive discussion. Addressing these concerns now can prevent future complications.
4. Categorise identified risks
Once your list of potential failures is complete, group them into clear categories to streamline your analysis:
- Financial: Funding, cash flow, revenue management
- Market: Customer validation, competitive landscape, market shifts
- Technical: Product or technology development, infrastructure reliability
- Operational: Daily processes, supply chain, resource management
- Legal/Compliance: Regulatory adherence, intellectual property, data protection
- Team/Culture: Leadership alignment, hiring practices, workplace culture
This categorisation will clarify areas where your startup is most vulnerable and guide where your efforts and resources should be focused.
5. Prioritise risks by likelihood and impact
Evaluate each risk using two critical dimensions:
- Likelihood: How probable is this risk to occur?
- Impact: What level of harm would this cause if it did occur?
Risks rated as high in both likelihood and impact must be addressed urgently.
Risks with moderate likelihood or impact should be actively monitored, and low-priority risks can be reviewed periodically. This strategic prioritisation ensures you’re not spreading resources too thin and helps maintain focus on key threats.
6. Develop clear mitigation strategies
Assign each high-priority risk to a specific owner responsible for managing its mitigation.
Clearly define action steps and realistic deadlines. Incorporate these strategies into your ongoing team meetings, regular check-ins, or strategic planning sessions. By systematically embedding these insights into your operational framework, you’ll create a more resilient, adaptable, and future-proof startup.
How to use a pre-mortem analysis for ongoing risk management
A pre-mortem delivers the most value when it’s part of your regular decision-making process. We recommend carrying this task out quarterly or annually, or before major events (like launching, raising capital, or introducing a new product).
Broader benefits
Pre-mortem analyses enhance investor confidence and build trust by demonstrating your company’s strategic maturity and how you proactively manage risk.
This exercise can also benefit your team culture, as it encourages open dialogue. Carrying out a pre-mortem analysis naturally encourages collaboration and teamwork to solve problems.
Tools to support continuous use
Make your pre-mortem analysis repeatable and efficient with the following tools:
- Project management – Trello for basic and user-friendly task tracking and collaboration. Asana and Monday.com for more robust project needs.
- Metrics/dashboards – Baremetrics for real-time metrics, customer insights, and forecasting. ChartMogul is excellent for investor-ready reporting and integration with billing systems.
- Documentation – Google Docs is a simple and free workspace. Try Confluence for more powerful organisation and team knowledge management.
Set your business up for success with smarter planning
Understanding why startups fail is the first step to beating the odds. No entrepreneur wants to think about their business failing, but a pre-mortem provides vital clarity and invites you and your team to look ahead. It’s a chance to confront uncertainty and replace it with agility and a strategic mission.
Ready to take the next step? Quality Company Formations specialises in helping new business owners with startup planning and building stronger foundations.
If you have any questions, comment below. And don’t forget to browse the QCF Blog for more practical insights and expert guidance tailored to small business success.
Please note that the information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. While our aim is that the content is accurate and up to date, it should not be relied upon as a substitute for tailored advice from qualified professionals. We strongly recommend that you seek independent legal and tax advice specific to your circumstances before acting on any information contained in this article. We accept no responsibility or liability for any loss or damage that may result from your reliance on the information provided in this article. Use of the information contained in this article is entirely at your own risk.
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