With all of the news lately on popular blogs like TechCrunch showing how so many companies each day are raising millions of dollars in venture capital money, how many of these can actually succeed? From one person’s perspective, things may look easy. Create a website, raise funding, and soon enough everyone involved will be bought out and become instant millionaires.
Despite this logic, even with massive amounts of funding, hot tech startups fail much more compared to what most would think.
According to research by Shikhar Ghosh, a teacher from Harvard Business School, 3 out of 4 startups backed by venture capital firms end up failing. However, it is important here that the word “failing” is clearly defined. Failing in Ghosh’s research means that the startups did not return the money back to the original venture capital investors.
The Current Startup Environment
Many analysts out there would say that right now, the startup world is in somewhat of a bubble. While this isn’t comparable at all to the Dot-com bubble and subsequent crash, it does seem apparent that so many companies out there are being given funding left and right on the hopes of becoming the next Facebook or YouTube.
According to a statement by Ghosh to the Wall Street Journal, the National Venture Capital Association believed that the amount of startups that fail was only between 25 and 30 percent. For many firms to hear that this number may actually be around 75 percent, there may soon be shifts on exactly which startups get funding and the amount they receive.
To determine this number, Ghosh analyzed the data he received from over 2,000 different startups who received at least $1 million in funding between 2004 and 2010. Ghosh even stated that he found similar results when stretching the amount of data further back, and comparing companies between 2000 and 2010.
Should This Number Really Be That High?
It’s important to keep in mind that when a venture capitalist fails in their investment, they do not talk about it. While failures are kept quiet as a company may be seeking a business bankruptcy lawyer in New York or California, successful ventures are often discussed frequently. That’s just how investments work. However, it is important to keep in mind that everyone has a different idea in terms of what is considered a true “failure.”
According to Ghosh, this is where numbers start to go up or down. For instance, if failure means that investors have lost everything and all company assets have been liquidated, the failure rate hovers between 30 and 40 percent. However, if failure is considered missing a return on investment goal, the number raises to around 95 percent of startups “failing.”
The Future of Venture Capitalism
Despite these scary new numbers published by Shikhar Ghosh, it’s always important to remember that statistically, venture-backed companies have a larger success rate compared to non-venture backed companies, especially in the earlier years of the company.
According to a report by the Huffington Post, startups that are considered successful typically sell for an average of $196.8 million. Numbers like these is what keeps venture capitalists coming back for more.