Raonic lost 6-3, 3-6, 6-4, 7-6 (10) to Grigor Dimitrov of Bulgaria on Saturday, dashing his hopes of a third fourth-round spot in Melbourne in four years.
The Thornhill, Ont., product said he rushed at times and had troubles with execution.
"I just wish I was a little bit more efficient," Raonic said. "My numbers weren't great when I was at the net. It wasn't how I was coming in, it was my execution with the volley.
"I don't think I'll spend too much time on it, there's too much tennis to be played this year."
The match, billed as a "next-gen" encounter between two of the sport's rising stars, lasted two and a half hours.
Raonic, seeded 11th, saved four match points in a dramatic fourth-set tiebreaker, raining down a total of 21 aces in his losing effort which included 50 winners, 39 unforced errors and one break of serve in his favour.
The victory was the second in a row for the 22nd-ranked Dimitrov, who beat Raonic in Jan., 2013 in Brisbane. The Canadian won their first match in Stockholm three years ago.
Raonic started out strong in the first set of the highly anticipated match-up, but failed to convert on a pair of break-point chances in the third game, with Dimitrov saving a second opportunity with an ace.
The Bulgarian got Raonic in trouble in the eighth game, earning three break points and securing a break for 5-3. A game later, after 27 minutes, Dimitrov had the set in hand.
Raonic answered by winning the second set thanks to a break in the fourth game, but Dimitrov took the third 6-4 after breaking in the penultimate game.
The contest tightened in the fourth set, with Dimitrov standing two points from victory at 30-15 in the tenth game. Raonic held his nerve to level at five games apiece. The set went into a tiebreaker, with Raonic losing a 4-2 lead in the decider.
Raonic went into survival mode as his opponent earned two match points — the first a serve out wide, and the second a tight Dimitrov backhand miss.
"I was rushing a little bit (in the fourth set) and was struggling with execution," Raonic said. "I was putting a little bit too much on myself to get ahead quickly with the serve."
Raonic saved another match-winner with his 19th ace, then fired his 20th for a set point of his own.
Dimitrov saved it and eventually scored the upset after Raonic rescued another two match points before going down from a forehand to the net on Dimitrov's fifth chance.
Eighth seeds Daniel Nestor from Toronto and Serbia's Nenad Zimonjic reached the men's doubles third round by defeating Croatians Marin Dragania and Mate Pavic 7-5, 6-1.
Eugenie Bouchard, Canada's last singles survivor in the event, plays Australian Casey Dellacqua on Sunday night. Bouchard won her doubles with pick-up partner Vera Dushevina, beating Germany's Anna-Lena Groenefeld and Mirjana Lucic-Baroni 6-4, 7-5.