The Startup Failure Rate Among Angel-Funded Companies
With all the news about hundred million dollar rounds and billion dollar valuations, it can be hard not to look at the world of entrepreneurship and angel investing as a thrilling ride that only has one stop: success. But to be a successful entrepreneur or serious angel investor, you must have a realistic understanding of the startup failure rate and internalize that, in fact, most startups will fail.
Each year in the United States there are millions of people starting up (like a dog-walking service or an iPhone app) on their own. Of these, approximately 3 million actually incorporate their business. Of those, approximately 700,000 both incorporate and hire at least one person other than the founder. So how do these 700,000 hopeful startups factor into the startup failure rate?
Let’s start by taking a look at how many of these companies might get funding. Tracking data from Gust shows that angel investors invest in roughly one out of every 40, or about 2.5 percent, of the companies they see. (And this is high compared to VCs, who are far more picky; According to the U.S. Small Business Administration, venture capital funds invest in fewer than 1 in 400 companies who pitch them.)
Next, let’s examine the startup failure rate of companies that do get an investment. It is important to note that because angel investing deals with private companies and Accredited Investors are exempt from most regulation and tracking, reliable statistics around the true startup failure rate are not readily available. But, I’ll take a shot at the real answer in a purely anecdotal and totally subjective table with numbers pulled out of the air (based on my personal investments in over 100 companies, New York Angels’ involvement in several hundred others and nearly two decades of familiarity with active angel investors). The following table is my best guess of the most common angel exit scenarios, including the startup failure rate.
As seen by the top row, half of these companies go out of business…which can be considered the startup failure rate of angel-funded companies. Of the remaining 50%, two will eventually return just the capital that was originally invested, leaving only three as profitable exits.
This table reinforces two lessons I believe in very strongly. The first, for angel investors, is that investing in early stage, pre-profitable companies is risky, with only a small minority of companies having significantly successful outcomes. Because of this, I strongly recommend investing in at least 20-25 companies over a five year period. I expand on this in detail in my book, Angel Investing: The Gust Guide to Making Money & Having Fun Investing in Startups.
The second, for entrepreneurs, is that to be successful you need to have a realistic understanding of the startup failure rate. Even though your company will no doubt defy the odds and become a success, it is important to internalize that success does not happen overnight.
Written by David S. Rose
You might also be interested in
Today we’re proud to release an updated Co-founder Equity Split tool. We released the first version back in November to help startup founders divide the ownership of their startup fairly and rationally among their team. Since then, we’ve been collecting feedback from founders about how it could better help them with their decision.
With this release, the tool gives founders
Co-founder Equity Split: A New Framework to Objectively Divide Startup Ownership and Get Back to Building a Business
We’ve just released our free Co-founder Equity Split tool. It’ll give you a fair and objective recommendation about how to divide your startup’s ownership, so you and your co-founders will have a sensible, real starting point for this notoriously hard, crucially important conversation.
Many startup founders find themselves lacking clarity and direction when it comes time to divide their
Gust announces acquisitions of Sharewave and Preferred Return; creates the most robust and affordable equity management solution for early-stage startups.
June 22, 2016 – NEW YORK, NY – Gust, the global service provider powering the entrepreneurial ecosystem, announced today the launch of a comprehensive equity management platform, Gust Equity Management. The new platform provides early-stage companies with powerful
With startup growth up 61% since 2014 and more investment programs emerging, it can be overwhelming for founders to know just where to jump in. As the most startup-friendly accelerator on the planet, MassChallenge has helped 835 startup companies around the world, who have raised over $1.1 billion in funding and created over 6,500 jobs. We have seen startups at
Early-stage technology company valuations are generally a crap-shoot. Bill Payne did a great post about this in October 2011. This post builds on top of his work, and attempts to shed additional light on the valuation process.
New founders may think that startup valuations work like this:
I figure out what the value of my existing company is I figure