Startup Mortality Rates
Startup mortality rates are increasing, affecting customer churn. Historically, one-third of startups succeed, one-third disappoint, and one-third fail, with a small percentage generating most returns despite fluctuating market conditions.
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The discussion on startup mortality rates highlights the challenges faced by new businesses, particularly in the current economic climate. A friend of the author noted an increase in startups closing down, leading to customer churn. The author reflects on their experience at Union Square Ventures (USV), where they have not seen significant mortality in their portfolio recently, but they remain aware of the risks involved. They share a common investment pattern observed in venture capital: approximately one-third of investments are successful, one-third are disappointing, and one-third result in total loss. This aligns with data from Marc Andreessen, which indicates that a significant portion of venture capital investments yield no return or minimal returns. The author emphasizes that while startup mortality rates fluctuate with market conditions, historically, a small percentage of investments generate the majority of returns. This trend has persisted over the decades the author has been involved in early-stage venture capital, suggesting that while the landscape may evolve, the fundamental dynamics of investment returns remain consistent.
- Startup mortality rates are rising, impacting customer churn for businesses serving startups.
- Historical investment patterns show that about one-third of startups succeed, one-third disappoint, and one-third fail completely.
- A small percentage of investments typically generate the majority of returns in venture capital.
- Market conditions influence startup mortality rates, which can fluctuate over time.
- The trends in venture capital investment returns have remained stable over the past forty years.
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9 commentsThere is also a significant time factor involved. The longer a startup has been alive, the more likely it is to have a bigger exit. Startups that go to zero tend to do so fairly quickly. And startups that end up 10x take quite a while to get there (YouTube would be a major exception to this, reaching 1.6 billion in just 1.5 years).
The harder to predict ones are the ones in the middle. The less than 1x returns could happen quickly or take a decade.
From a founder perspective, this is abysmal because the chance of you getting funded by the likes of a16z or YC is already really slim, about 1% according to YC.
So let me ask you something: would you embark on a journey if you knew your chance of success is 0.3%?
So many good startups go to oblivion, pandering to the VCs. Where they could have been more resilient on their own.
- 25% of investments make zero return (i.e. 100% write offs)
- 25% produce a return greater than zero but less than 1x (i.e. are losses)
- 25% produce a return between 1x-3x
- 15% produce a return between 3x-10x
- 10% produce a return of 10x or greater
If you bucket the first two as "zeros" or near zeros, the third one as "something you wish you hadn't invested in" and the last two as good investments, you get to roughly the same 1/3, 1/3, 1/3 that I like to use.
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Start-up failures in the US rose 60% in the past year, threatening jobs and highlighting funding struggles, particularly outside artificial intelligence, with only 9% of 2021 venture funds returning capital.
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The startup landscape is evolving, with increased competition and market saturation diminishing the potential for outsized returns, particularly in AI-driven products, leading to a fragmented entrepreneurial environment.