9/10 Startups Fail?
I just got done watching Start-Up Junkies on HULU. Pretty cool documentary and does a great job of showing how the start-up process works. At the beginning of the show they reiterate the old stat that 9/10 start-ups fail. I call BS. http://smallbusinessplanned.com/information/small…
So my question to those in VC, what has been the failure rate from your experience?
Define 'fail'.
Yeah, this is pretty critical.
Even 15 years ago, "fail" meant you lose everything and the business goes under. That simply isn't happening to 9 out of 10 start-ups anymore. You might not achieve an exit (and thus might be considered a failure by that measure) but that doesn't mean you're not receiving consistent cash flow from the company you started.
Rule of thumb I've heard from the VC perspective is 5-7 companies return less than the original investment (liquidation value), 2-3 return ~1-3x and 1-2 are home runs (~10x+). Your fund return really depends on the home runs.
I could actually believe it. My team invests in 1%-2% of all the deals we see. I think the numbers are very different for failure rates of start ups over all and failure rate for start ups with VC investors. I would expect the later to be a lower fail rate.
Depends on sector. I'd venture to say that a lot of the small business failures are consumer retail focused while 9/10 medicine based businesses will certainly not all fail
You can see the failure rate of each Y Combinator batch of startups here: http://www.techgox.com/accelerators/Y-Combinator/details?sort=-failrate
It's not 9/10, but it's still fairly high (considering the fact that YC would be one of the most reputable startup incubators).
If you include all the projects that fail to get any funding or support, then that 9/10 figure is quite possible...
Looks like between 2006 and 2010 only 28% of those YC startups have failed, based on whatever YC's definition of failure is (Thats an important detail I don't have any information on)
Doing late-stage VC and the 33% failure rate (according to your link) at year 4 sounds about right.
That's the general rule I've heard most VCs work by
One additional note - I have witnessed a lot of startups fail because of founding partners being handicapped by each other. When you first start a business with someone, it's always happy go lucky, but add a year or two into operations, pressing financial situations, bf/gf issues and all of the sudden everyone can have their own agenda. Things can spiral downwards very quickly, especially if at the time of incorporation you issued 50/50 equity.
It really depends on the stage. If you look at early-stage seed funding, there's a lot of fluff and one-man companies that die in the egg quickly (especially in tech, with all the Zuck wannabes). Do you count all of these? Do you count getting the company registered as part of the startups? Do you count companies only after seed funding from savings, friends & family? Or after funding from an actual fund? Your numerator and denominator can greatly change by considering these questions. 9/10 sounds dramatic, but probably right if you look before institutional seed funding. If you go later-stage, odds improve dramatically. My fund does later-stage healthcare deals where the device, compound or service has been de-risked (approved/cleared by regulatory authorities) and that the company is about to launch. There, we take market risk. At that point, the failure rate is under 30-40%.
It really depends on you as an investor.
There are people who invest a little into a lot of companies. And there are investors who invest a lot into a little bit of companies. It is all about the risk you're willing to assume. Obviously, when you fund your own vc firm, you can do whatever you want. The problem that many VCs face are dealing with other partners and their own board. They don't want the money to just sit.
Every firm differs when it comes to success/failure rate. You can't really expect to hit home runs really. They just happen. The gods bless the world with some super genius who just happens to see the world differently. And if that person decides to capitalize off of the world, then you might hit a home run. But in all honesty, you could easily go years without finding that google, yahoo, facebook, hotmail.
The ideal situation is to start as an entrepreneur, exit a company, and start your own fund with your own money.
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