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

Harvey Gross

Written by

VC & Company Builder working on extending human healthspan

Venture Insights

Insights about VC and Company Building

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