Let me start this post by making a simple statement. By the time I would finish writing this post, according to latest startup trends, around 11,000 new startup business would get added to this world. Must be wondering how I found that number?
According to a massive research startup study done by Global Entrepreneurship Monitor– around 472 million entrepreneurs worldwide attempting to start 305 million companies, approximately 100 million new businesses (or one third) will open each year around the world.
” The developing countries of Asia and Latin America are far ahead of Europe in starting new businesses, according to a recent survey of global entrepreneurial activity. But few start-ups have the potential to make an impact on jobs and growth, and a negligible number benefit from venture capital, with the vast majority reliant on informal funding. The 2002 annual survey by the Global Entrepreneurship Monitor (GEM) was carried out across 37 countries representing 92% of world GDP. It finds that 286 million people, 12% of the workforce in these countries, are engaged in starting or running a new business, implying a global figure of about 460 million. “We were quite shocked by how high the index is in the developing countries,” admits Paul Reynolds, the GEM project co-ordinator. “Only now do we have a fuller understanding that half of the people in many developing countries are doing it out of necessity because they cannot find work, and that is what drives the rate up so high.”
Every now and then we keep seeing these lists on buzzfeed or twitter around “17 coolest startups that can change your life” (like this one) and I’m sure a lot of you feel wow about the whole concept of startups. But let me spoil your party, most of these startup companies typically die around ~20 months after their last financing round and after having raised $1.3 million.
- 55% of failed startups raised $1M or less, and almost 70% companies died having raised less than $5M overall. Not a big surprise. Companies at the earliest stages are the most vulnerable due to limited financial runway, immature products and businesses and general uncertainty about whether the market needs what they’ve built.
- In each year since 2010, 70% of all dead tech companies have been in the internet sector. This is hardly a surprise as within tech, a majority of funding and deals has gone to the internet sector and so it would follow that the sector would have the largest proportion of dead companies. The % of companies dying within the internet sector has stayed relatively range bound over the last several years as well.
On his many failed experiments, Thomas Edison once said,
I have learned fifty thousand ways it cannot be done and therefore I am fifty thousand times nearer the final successful experiment.
Well, it seems a lot of our modern day entrepreneurs have taken that quote to their hearts.
The rate at which startups are failing is quite incredible. Media, quite literally has made the whole idea of startup funeral extremely cool. It is hilarious (even bizarre) that the failed entrepreneur wants to grab the same attention like a war hero. The irony however, is that the media (especially the social media) is happily obliging to do it. Public post mortem of a failed Startup seems to have become a general startup trends in the business circles. A lot of professionals find it intellectually stimulating to visit the #RIP sessions of the startups.
According to CB Insights report:
- While the dead companies on our list raised $11.3M on average, the median funding raised which is a better measure in this case was $1.3M.
- the average company dies ~20 months from its last funding round in the absence of additional funding or acquirers.
But the question which is bugging me continuously is,
Why do so many startups fail?
Typically, there could be hundreds of possible reasons for a failed startup like:
- lack of strong value proposition
- high risk low return business model
- longer sales cycles
- non scalable, non profitable business
and many, many more. You could actually read about reasons of startup failure all around the web.
According to CB Insights startup trends,
“Death is not specific to a particular type of sector or industry. In fact, the companies on our dataset represent a fairly diverse set of subindustries.”
Interestingly, in the following Ted Talk, Clara Brenner, Co-Founder of Tumml talked about why a lot of social startups face such high failure rates.
She has mentioned about the importance of seed funding & how it needs to be utilized in a startup.
Also, the relevance of Impact Investors to Urban Innovation startups can be co-related with the importance of finding the right investor that matches your company’s vision.
Finding a right investor for a startup is nothing short of doing matrimony match making. A lot of the startups fail even after getting several rounds of seed funding because the investor does not show enough trust or faith in the founding team’s vision.