AI Startups That Failed in 2024 And Why!

The AI startup landscape is both exciting and unforgiving. While the sector has witnessed explosive growth, with tens of thousands of startups worldwide, the path to success is riddled with challenges. Alarmingly, approximately 90% of AI startups fail within their first year of operation. Despite significant advancements and immense potential, the hurdles these startups face are numerous, often resulting in early exits from the market.

One of the most significant challenges is the lack of market demand. Many startups focus on creating cutting-edge solutions without addressing a pressing need, leading to poor product-market fit and inadequate revenue generation. This disconnect between innovation and practicality is a recurring issue, with startups struggling to align their offerings with customer needs.

Financial instability is another major barrier. High development costs, coupled with limited funding opportunities, often leave startups in precarious positions. Recent downturns in global venture capital funding have exacerbated these issues, making it even harder for emerging companies to secure the resources they need to scale and sustain operations.

Operational challenges further compound the problem. Startups frequently grapple with issues like ineffective business models, inadequate marketing strategies, and team-related conflicts. Poor leadership, internal miscommunication, and unclear strategic direction can disrupt even the most promising ventures, while weak marketing efforts hinder their ability to stand out in an increasingly crowded marketplace.

Moreover, the inherent complexity of AI technology poses its own risks. Overestimating AI capabilities or failing to meet industry standards can quickly erode trust and credibility. Additionally, cybersecurity vulnerabilities leave startups exposed to potentially devastating breaches, threatening not only their operations but also their reputation.

1- Artifact

Artifact’s journey as an AI-powered startup highlights the challenges of standing out in a competitive market. Despite its initial appeal as the “TikTok for news,” the app struggled to maintain demand beyond its launch. With just 444,000 downloads since February 2023, most occurring during its debut, Artifact failed to capture a substantial mainstream or international audience. Its limited reach was evident, as 44% of downloads came from the U.S., with no other country surpassing 4%. Competing against established players like SmartNews, Google News, and Apple News, Artifact couldn’t carve out a unique niche. The hyper-competitive news curation space left little room for new entrants, especially without clear differentiation.

Another major issue was a lack of focus, as Artifact shifted from being an AI-powered news reader to integrating features reminiscent of Twitter, Pinterest, and even recommendation engines. This diluted its original value proposition and confused users about its core purpose. Additionally, as a self-funded venture, the founders may have been unwilling to sustain losses or seek external funding. While Kevin Systrom cited market size as the primary reason for shutting down, the combination of limited demand, unclear positioning, and fierce competition likely contributed equally to Artifact’s inability to succeed.

2- Shyp

Shyp’s failure serves as a cautionary tale for startups navigating the challenges of the on-demand economy. At its core, Shyp struggled with an unsustainable business model that relied on a flat-rate fee structure for pickups and packaging. While this initially attracted customers, the shipping costs for smaller packages often exceeded the fees, leaving the company unable to generate sufficient revenue to offset high operational expenses. The average order value remained low, making it difficult for Shyp to achieve profitability. Furthermore, its labor-intensive logistics model, involving couriers, warehouses, and transportation, compounded overhead costs and limited its ability to scale efficiently.

Compounding these challenges was Shyp’s inability to compete effectively against industry giants like FedEx, UPS, and USPS, which had the advantage of established infrastructure, economies of scale, and brand loyalty. Rapid expansion to multiple cities in the U.S. stretched Shyp’s financial resources and operational capabilities, creating inefficiencies and increasing costs. CEO Kevin Gibbon later admitted that ignoring investor advice to focus on small businesses, rather than individual customers, was a critical misstep. Shyp’s reliance on infrequent users drawn by low fees proved unsustainable, highlighting broader questions about the profitability of the on-demand economy. 

3- Tally

Tally’s closure highlights the challenges fintech companies face in sustaining operations amidst shifting market dynamics. Despite raising over $200 million in funding and helping consumers pay down more than $2 billion in credit card debt since its founding in 2015, Tally struggled to maintain financial stability. The company’s pivot from a direct-to-consumer loan model to a B2B credit card debt management platform signaled trouble, as it attempted to adapt to declining funding in the fintech sector and increasing investor expectations for faster progress. While the B2B product showed promise, even securing a partnership with a major consumer company, it was not enough to overcome operational challenges and capital constraints.

Broader market forces also played a role in Tally’s downfall. Global fintech investment plummeted from a peak of $210 billion in 2021 to just $15.9 billion in the first half of 2024, reflecting investor caution and economic headwinds. Tally’s reliance on partnerships, including with Cross River Bank, added complexity as regulatory scrutiny heightened for such partners. Ultimately, Tally’s inability to secure sufficient funding to support its operations, coupled with the competitive and volatile fintech landscape, forced it to shut down.

4- Eaze

Eaze’s fall highlights how even tech-driven innovation can’t always overcome market volatility. The company once leveraged big data and AI to predict supply and demand, optimizing its cannabis delivery network across California. They used data to help medical marijuana retailers predict the supply and demand and change inventory and delivery based on the information. However, financial troubles, regulatory burdens, and competition from unlicensed operators ultimately outweighed the advantages of its technology. A $36.9 million loan default forced Eaze into acquisition by billionaire James Henry Clark, but even new ownership couldn’t steer the company to stability.

Labor disputes further strained operations, with unionized workers securing contracts while supervisors struggled with stagnant wages and uncertain rights. Additionally, Google’s policy change banning in-app cannabis purchases disrupted Eaze’s ability to connect with its customers. Despite its technological edge, Eaze couldn’t overcome the pressures of high operating costs and an unstable market. With its shutdown in December 2024, 500 employees face layoffs, marking a sobering end for what was once California’s largest cannabis delivery service.

5- Ghost Autonomy

Ghost Autonomy, an AI startup founded in 2017, aimed to revolutionize autonomous driving by integrating in-car AI with multimodal large language models (LLMs) to enhance reasoning in complex driving scenarios. Despite raising $238.8 million and filing 49 patents, the company struggled to gain industry acceptance for its technical approach. Skepticism surrounded its reliance on LLMs for self-driving applications, as experts questioned the feasibility of this method in real-world scenarios. Combined with the lengthy development timelines required for autonomous vehicle technology, these doubts undermined investor confidence and highlighted the challenges of delivering on its ambitious vision.

Financial hurdles compounded Ghost Autonomy’s struggles. While the startup secured funding, including a $5 million investment from OpenAI, it failed to establish a clear path to profitability. The uncertain funding climate and inability to secure long-term financing proved insurmountable, forcing the company to shut down in April 2024. 

If you are planning to start your own startup you sure need to read this!!