How many startups fail and what is a failure?
“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?
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 1–3x 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 less — 60% 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.