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A recent article in the Wall Street Journal reveals that the number of startups that fail to return their investors’ capital, might be significantly higher than generally reported.
The article cites a study by Shikhar Ghosh, a senior lecturer at Harvard Business School that estimates that three out of four venture-backed startups go bust. That’s in stark contrast to estimates given by the National Venture Capital Association in the US, who puts the failure between 25% to 30%.
According to the article, venture capitalists generally agree that “of 10 startups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns.”
Why the discrepancy? A lack of in-depth research into failures, believes Ghosh. The data used in his study is drawn from 2000 venture-backed companies — generally to the tune of US$1 million — between 2004 and 2010. Ghosh’s research also includes information gathered from VC company portfolios and people involved in startups.
Venture capitalists “bury their dead very quietly. They emphasize the successes but they don’t talk about the failures at all,” says Ghosh.
Ghosh also believes there are different definitions of failure.
If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. startups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of startups fail, based on Mr. Ghosh’s research.
The article also reveals two interesting related statistics. According to the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, 60% of startups survive three years before they are acquired, pivot or go out of business. 35% survive to year 10.
The article concludes by citing statistics from the Dow Jones VentureSource that show 84% of the 6 613 US-based companies initially funded by venture capital between 2006 and 2011, are now are closely held and operating independently, 11% were acquired or IPOed and four percent closed shop. Fewer than 1% of them are currently in IPO registration.