Well, the numbers don’t lie, even if there are several sources of these statistics. Starting a company is HARD – in so many ways. And risky too.
Let’s start with a restaurant -not our thing. But…
I read several years ago that the average startup restaurant lasts only about a year. Ouch! Here I am a professional investor in early-stage companies, and I attempt to find those with the greatest chance of success and growth in value over time. Restaurant startups would not top my list.
Data does not lie.
We have years of real data to call upon: data that impacts both investors and entrepreneurs. There are two reliable sources of reasonably recent data for us to examine. The Angel Capital Association recently published a study contributed to by several of my friends quoting that seventy percent of investments made by angel investors to date return less than the amount invested – upon a sale or closing of the business – the great majority of these outright losses as businesses die.
Fortune Magazine and Harvard studies
Attempting to get to the number of real failures for all startups, not just those with angel group investments, Fortune Magazine published an article claiming that 90% of these startups do fail. The U.S. Census Bureau reports that 400,000 new businesses are started every year in the USA, but 470,000 are dying. What does THAT mean?
Even more credible statistics
[Email readers, continue here…] John Chambers, former CEO of Cisco, stated that “More than one-third of businesses today will not survive the next ten years.” And this includes all businesses, not just startups. Harvard University recently published a study that shows three of every four venture-backed firms fail. And the U.S. Bureau of Labor Statistics states that 50% of all businesses survive five years or more, and about one-third survive ten years or more. Remember that this includes the Fortune 500…
Here comes the SBA and its analysis.
The Small Business Administration (SBA) claims that 66% of new businesses survive their first two years (and that 50% fail during their first year in business.) Although these are not parallel studies or similar statistics, most seem to refute Fortune’s claim that 90% of all startups fail.
How about the early-stage investors?
You might be interested in this data as viewed from the early-stage investor’s viewpoint. Angel investors hold their average investment for 4.5 years before a liquidity event (positive or negative.) That buries the real data that – if you strip out the short-term company failures or investor losses, the number of average years to a positive return is between eight and nine. And that is after investment, not after a company’s start-up. Would you be willing to invest a significant portion of your wealth in “deals” that are completely illiquid for almost a decade on average?
But there is a pay-off for early-stage investors.
And yet, these same early-stage investors – if they diversify into enough companies and wait long enough – see an average annual return on their investments of 22%. Way above market investment returns. But those returns come from the 3% – yes only 3% – of their investments that pay out more than ten times the amount of the original investment.
Starting up a new company is risky. Investing in a young company is risky. But the potential returns over time for investors makes this an attractive diversification. And we hear of successes like the over 1,000 unicorn companies that make us all want to jump in and try our luck – even if the odds are well below 3% for ultimate success.
We are a cadre of optimists and that is unlikely to change.
Entrepreneurs will always start new enterprises. Angel investors will always finance many of them. We all look forward to the lottery win, and hope to be well-rewarded over time.