How many startups fail and what is a failure?

Harvey Gross
May 1, 2018 · 2 min read

“8/10 startups fail!”

But is this actually true? And why do they fail?

Cambridge Associates (CA) tracked the performance of 27,000 venture-backed startups over 20 years. The study concluded that the failure rate of venture-backed startups has not risen above 60% since 2001.

How come CA ended up with such a different finding compared to the commonly held belief?

Source: Industry Ventures LLC

The study defined failures as companies that provide a 1x return or less to investors. Entrepreneurs and VC fund managers have a different view on this. For a VC Fund to be able to offset an entire write off >60% of their invested capital and still provide investors with a return of 20% per year — the definition of failure needs to be a different one.

A ten-year VC fund needs to repay investors three times (3x) their investment. This means that if 6 investments return <1x and two return between 13x the remaining two investments have to repay a 30x return to provide the fund with a 20% compound return — and that’s just to generate a minimum respectable return.

There are different definitions of failure. If failure is defined by the study from CA, as liquidating the company or returning 1x or less60% of startups fail. If failure is defined by missing the investors expected minimum return — returning 3x or more →80% of start-ups fail. So, the next time you are pitching to a VC keep in mind that the potential market opportunity of your venture is big enough to offset the failures in the rest of their portfolio.

Venture Insights

Insights about VC and Company Building

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store