Most successful business and entrepreneur books emphasise success stories. Otherwise, they wouldn’t have sold. Maybe nobody wants to learn about failure?
The bias of startups’ survival paints an image too pretty to be real. What if we research failure stories rather than success stories?
In the madness of enthusiasm, it’s easy to forget that most entrepreneurs have crashed landed in the first three years of their existence. The fantasy comes to an end, and the realization strikes.
The smartest thing an entrepreneur can do is learn precisely why startups fail, find a problem, and think about avoiding it.
Startup failure rate:
- 2 out of 10 new companies fail in the first year of operations (source: Bureau of Labor).
- 9 out of 10 startups fail (source: Startup Genome).
- 7.5 out of 10 venture-backed startups fail (source: Shikhar Ghosh).
When we talk about startup failure rates, it’s essential to distinguish one crucial aspect:
Are we concerned about the failure rates of new companies in general (including conventional businesses like the new hairdresser salon)?
Or perhaps just about the failure rates of innovative and dynamic business ideas?
Failure statistics for all new enterprises:
Statistical sources from government agencies, especially in the US, are primarily concerned with the failure rate of new businesses.
This rate is valuable if the idea is closer to a typical business.
In this case, the baseline rate of failure will be less than 90%. One of the most mentioned statistics is the Business Employment Dynamics report from the Bureau of Labor that states that:
- 20% failed until the end of the 1st year
- 30% failed until the end of the 2nd year
- 50% failed until the end of the 5th year
- 70% failed until the end of the 10th year
We must, however, understand that most young registered companies aren’t real startups.
So it doesn’t make sense to assume that your 1st-year failure rate is just 20% if you’re trying to do something innovative.
Failure rates for all startups:
Early-stage (idea stage) startups assume the most significant risk and have the maximum failure rates.
The accuracy of the failure rate stats for these projects is hard to grasp since a substantial chunk is below the radar.
They don’t attract capital from funds or other organizations that maintain a record of their investments.
Initial-stage startups are financed by their founders, their families, and associates, the so-called Love Money.
A good number of early-stage startup projects don’t even register a legal entity – you don’t need one to try to validate an Idea. Some argue that only when you start making money would you need one.
The annual statistic states that 9 out of 10 startups end up dying at an early age.
The truth remains that startups are highly risky, as can be seen from a series of interviews with failed startup founders (Failory.com) and statistics from Startup Genome.
Failure rate implications for startup investors:
Then why invest in startups with such a horrific failure rate?
It’s all about how successful startups make up for failed startups.
Let’s take a startup fund that has a portfolio of 100 businesses. Usually, most of its gains will come from just one company (ideally a unicorn). That’s how unlikely it is to create a successful business.
That home run is typically followed by nine influential but not-that-big companies.
The ten successful startups reward more than 90 failures.
The assumption here is that startup investors are looking for the home run and are ready to lose money on most of their investments to reach the holy grail.
This means that, as an entrepreneur, you are unable to receive support from startup angels and Venture Capitalists unless you demonstrate a lot of ambition and scalability.
However, this does not mean that your concept or idea is not worth investigating if it does not meet the investment requirements of the VCs. Being a successful founder of a lifestyle company is far different from being an unfortunate founder of a typical go-big or go-home startup.
Failure rate consequences on entrepreneurs?
Let’s Suppose you try to create something revolutionary. In that case, you need to understand that you are most likely setting yourself up for failure.
That said, just realizing that you have a 90% risk of failing doesn’t sound like a safe bet. However, there are ways you can improve your odds of success. The fact that the average is 90% doesn’t mean that you can’t push this figure to your advantage.
The Startup Genome Project divides a startup lifecycle into four stages:
Discovery, Validation, Performance, and Scale.
If you’re in an Idea-stage startup:
It would be best if you focused only on Discovering and Validating your idea.
You are looking for the product-market fit.
In this case, the concepts of the Lean Startup by Eric Ries are highly relevant to you. The aim is to test your conclusions as quickly and as cheaply as possible and, if necessary, give yourself time to pivot (shift to a new strategy) and get traction. Your successful business or innovation initiative depends entirely on it.
Learn to focus and adjust your goals based on input from the consumer. Here are Some of the highlights of the Startup Genome Project that are relevant to you:
- Usually, startups require 2-3 more time to confirm their market than most entrepreneurs predict. (The inference here is that cashflow/availability issues could ruin the project before you were able to test the waters thoroughly).
- Entrepreneurs evaluate the worth of intellectual property before the product-market fit by 255%.
- New projects that pivot 1-2 times have 3.6x better user increases and boost 2.5x more money.
- Startups that pivot 0 times or more than two times are significantly worse. (The implication is that it is reasonable to secure sufficient time and resources to try up to two pivots.)
At a later stage:
You’ve validated your idea, and it’s making money, and you need to scale, optimize it, and make it performant to create a successful business.
One of the most common traps is scaling. It means over-investment of funds (in the broader definition of it) too early in the startup journey. If not done right, it’s a sure recipe for failure.
The bottom line is that although thinking globally and big, start small.
Start by Discovering and Validating your idea.
Test and Listen to the market as soon as you can.
If you do just that, I’d say you’ve increased your chances of success by at least 20%.
To get to at least 50/50 chances of building a successful business, you’ll probably need help. Be open to it.