Startups: the fine line between facts, fiction and conventional wisdom

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A lot of arguable facts and conventional wisdom are thrown around about failure rate, profitability, best locations for launching a startup, reasons for success or failure or fastest growing sectors. We are all guilty of managing our own reality to support our narrative, most of the time in good faith. But can we get closer to the facts? So that next time we are in a cocktail party, or talking to a startup entrepreneur, a business angel, a family office, a VC or any actor of this ecosystem, our distorted reality detector can be better tuned. Here are some of the usual suspects:

What percentage of startups fail?

You will always get an answer as everyone seems to have an opinion. No later than this week, I have heard 99%! That was from a family office friend who manages $3 billion of private clients’ money and supports his anti-startup investment narrative with his own distorted reality. But conventional wisdom says 90% of startups fail. Back in 2011, the Startup Genome Report (co-authored by researchers from UC Berkeley & Stanford) confirmed the mythical 90% mark (6). More optimist research by CBinsight give less drastic rate of failure of ‘only’ 70%, usually about 20 months after first raising financing (*1). These rates are more of an indication than numbers to live by. Moreover, it is unclear whether they only refer to startups who managed to secure seed funding. To get into the science of it, one must take into account the exact definition of what constitutes a startup, the scale of secured funding if any, and the business’s geographical location. It may be an explanation for the lack of clear statistics, even per country, on the percentage of failure for startups.

What is the typical period between financing rounds?

Research shows 18-20 months, whereas conventional wisdom points to 12-18 month (*2). The bottom line is the burn rate be should such that the money raised at each round should sustain the startup for the next 18 months. It leaves the CEO very little time to focus on their business between two funding rounds.

This period hardly varies depending on the type of round. The only exception is the ‘Seed to Series A’ period, which is on average 2 months shorter than between other rounds.

What is the average time to profitability for a startup?

The subject of profitability with startups is of growing mystery. It will soon become uncool to ask such a question. But any random figure north of 5 years can be ventured at no risk of being rebutted. Moreover, we should only focus on the little fraction of startups that survive. As a matter of fact, profitability seems to matter less and less.

To answer this question, we just have to look at Unicorns, the role models. They are the holy grail of startups and the aspiration of any ambitious entrepreneur. The verdict: most of them lose money. Furthermore, plenty of high profiles Unicorns well over 5 years old are nowhere close to making a profit: Uber (10 y/o), Tesla (16 y/o), Beyond Meat (10 y/o), Lyft (6 y/o), Pinterest (9 y/o), Zoom (8 y/o). In fact, money-losing companies are doing IPOs at a record rate (*6). According to data compiled by finance professor Jay Ritter of the University of Florida, 83% of IPOs in the first 3 quarters of 2018 involved companies losing money, the highest proportion on record. To summarise, it doesn’t seem to be any longer about making a profit any time soon.

Top 5 reasons startups fail:

  1. No market need
  2. Ran out of cash
  3. Wrong team
  4. Competition
  5. Wrong pricing

Other reasons include: product problems, wrong business model, lacking passion or focus (*3).

Top 10 startup ecosystems

1 – Silicon Valley
2 – NYC
3/4 – London
3/4 – Beijing
5 – Boston
6/7 – Tel Aviv
6/7 – Los Angeles
8 – Shanghai
9 – Paris
10 – Berlin (*4)

Top 5 fastest-growing startup sub-sectors

  • Advanced Manufacturing & Robotics
  • Blockchain
  • Agtech & New Food
  • AI, Big Data, & Analytics
  • Cybersecurity (*5)

Comments are welcome. If you have any reliable statistics you would like to share, or any question you would like to ask please do not hesitate to comment on Linkedin or Facebook.

Sources:

  1. CB Insights – 298 Startup Failure Post-Mortems
  2. StartUP FIU – How much runway should you target between financing rounds?
  3. CB Insights – The Top 20 Reasons Startups Fail
  4. Startup Genome – Global Startup Ecosystem Report 2019
  5. Startup Genome – Startup Genome Report Extra on Premature Scaling
  6. WSJ – IPO Market Has Never Been This Forgiving to Money-Losing Firms


Philippe Gelin

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