Investing in startups is inherently risky. In fact, a quick search online will show the often-quoted statistic: eight (or even nine) out of 10 startups will fail. Today, we’re diving into that statistic in depth to see how risky startups really are…and the statistics you need to know.
How many startups are successful?
It’s a figure that’s hard to track, in part because the definition of startup varies (most commonly defined as “a company that is in the first stage of its operations”), but it does seem to counter commonly held beliefs. According to the U.S. Bureau for Labor Statistics, 50% of all new businesses survive for at least five years and 30% make it to their tenth year. For small businesses in particular, perhaps most similar to the standard definition of “startup,” about 20% will fail by the first year and 50% will fail by the fifth year.
What industries see the most long-term success?
After four years, 58% of companies within the finance, insurance, and real estate fields were found to still be in operation. Education-, health-, and agriculture-related companies followed closely with 56% in operation after four years. At the other end of the spectrum is the information industry, with only 37% of companies in operation after four years.
However, success rates by industry tend to ebb and flow with economic changes. For example, while startups within the construction industry held a survival rate of only 36% in 2005 – right at the beginning of the housing bubble burst – that figure increased to 50% in 2011.
What are the common reasons for startup failure?
Paul Graham, Cofounder of the Y Combinator incubator, claims that nearly all failure stems from a startup not creating a product or service that consumers need or want – and research from CB Insights supports that. CB Insights studied more than 100 startups that eventually shut down to discover why some startups are more successful than others, and the top five reasons include: no market need, running out of funds, a bad team, high competition, and pricing/cost issues.
Before any investment, it is important for you to familiarize yourself with investing process and to become comfortable with risk. According to Modern Portfolio Theory, diversification is one way investors can potentially achieve a balance of risk and returns. Diversifying, or investing in assets with little or no correlation, can prevent all areas of your portfolio from decreasing in value if one specific industry takes a hit. By diversifying your portfolio, you’re potentially providing protection when the market gets rough, allowing the fulfillment of long-term financial goals while minimizing the risk of losing everything at once. However, even a well-diversified portfolio does not guarantee returns, and the overall portfolio still has the potential to lose value.