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
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