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What Are the Odds of Your Startup Success?

By: Dave Berkus


Group of good looking business women standing at workplace and posing for the portrait with successful expression. Empowered and proud female executive colleagues looking at camera with formal suit

Let’s start with a restaurant – not our thing. But…

I read several years ago that the average startup restaurant lasts only about a year.  Ouch! Here I am a professional investor in early-stage companies, and I attempt to find those with the greatest chance of success and growth in value over time.  Restaurant startups would not top my list.

Data does not lie

We have years of real data to call upon: data that impacts both investors and entrepreneurs. There are two reliable sources of reasonably recent data for us to examine.  The Angel Capital Association recently published a study contributed to by several of my friends quoting that seventy percent of investments made by angel investors to date return less than the amount invested – upon a sale or closing of the business – the great majority of these outright losses as businesses die.

Fortune Magazine and Harvard studies

Attempting to get to the number of real failures for all startups, not just those with angel group investments, Fortune Magazine published an article claiming that 90% of these startups do fail.   The U.S. Census Bureau reports that 400,000 new businesses are started every year in the USA, but 470,000 are dying. What does THAT mean for startup success?

Even more credible statistics

John Chambers, former CEO of Cisco, stated that “More than one-third of businesses today will not survive the next ten years.”  And this includes all businesses, not just startups.  Harvard University recently published a study that shows three of every four venture-backed firms fail.  And the U.S. Bureau of Labor Statistics states that 50% of all businesses survive five years or more, and about one-third survive ten years or more. Remember that this includes the Fortune 500…

Here comes the SBA and its analysis

The Small Business Administration (SBA) claims that 66% of new businesses survive their first two years (and that 50% fail during their first year in business.)  Although these are not parallel studies or similar statistics, most seem to refute Fortune’s claim that 90% of all startups fail.

How about the early-stage investors?

You might be interested in this data as viewed from the early-stage investor’s viewpoint.  Angel investors hold their average investment for 4.5 years before a liquidity event (positive or negative.)  That buries the real data that – if you strip out the short-term company failures or investor losses, the number of average years to a positive return is between eight and nine.  And that is after investment, not after a company’s start-up.  Would you be willing to invest a significant portion of your wealth in “deals” that are completely illiquid for almost a decade on average?

But there is a pay-off for early-stage investors.

And yet, these same early-stage investors – if they diversify into enough companies and wait long enough – see an average annual return on their investments of 22%.  Way above market investment returns. But those returns come from the 3% – yes only 3% – of their investments that pay out more than ten times the amount of the original investment.

Starting up a new company is risky. Investing in a young company is risky.  But the potential returns over time for investors makes this an attractive diversification.  And we hear of successes like the over 1,000 unicorn companies that make us all want to jump in and try our luck – even if the odds are well below 3% for ultimate success.

We are a cadre of optimists and that is unlikely to change.

Entrepreneurs will always start new enterprises. Angel investors will always finance many of them.  We all look forward to the lottery win, and hope to be well-rewarded over time.

Published: November 1, 2023

Source: Berkonomics

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Dave Berkus

Dave Berkus is a noted speaker, author and early stage private equity investor. He is acknowledged as one of the most active angel investors in the country, having made and actively participated in over 87 technology investments during the past decade. He currently manages two angel VC funds (Berkus Technology Ventures, LLC and Kodiak Ventures, L.P.) Dave is past Chairman of the Tech Coast Angels, one of the largest angel networks in the United States. Dave is author of “Basic Berkonomics,” “Berkonomics,” “Advanced Berkonomics,” “Extending the Runway,” and the Small Business Success Collection. Find out more at Berkus.com or contact Dave at dberkus@berkus.com

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