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The Unicorn Hunt Continues Though Most Startups Backed by Venture Capital Fail

Editor’s Note: This piece was originally published in Jan. 2015 and was updated in Oct. 2017

Five years ago, venture capital statistics were showing that more than three out of four startups backed by venture capital fail – and no one wanted to talk about it, according to Harvard Business School senior lecturer Shikhar Ghosh. And for the most part, they still don’t want to.

According to articles in the Wall Street Journal and  Inc. Magazine, Ghosh, in 2012, noted the statistics were even more stark, depending on one’s definition of “failure,” as 95% of VC-backed companies don’t deliver the projected return on investment.

Fast-forward 5 years and the news isn’t much better. After tracking over 1,000 tech startups, CB Insights concluded the following in 2017:

  • “[Less than] half (46%) of companies that raised their initial seed in 2008–2010 ended up raising a second round of funding.”
  • “Only 306 (28%) of companies that raised a seed round in 2008–2010 exited through an M&A or IPO within 6 rounds of funding.”
  • “Less than 1%, 10 (0.91%) companies from our [research] ended up becoming valued at $1B+. Some of these companies are the most-hyped tech companies of the decade, including Uber, Airbnb, and Slack.”
  • “70% of companies end up either dead, or become self-sustaining (maybe great for the company but not so great for investors)… [it’s hard to find exact numbers because], some companies stumble on as zombie companies for years before calling it quits. Not to mention, the death of companies generally happens without any official announcement.

95% of VC-backed companies don’t deliver the projected return on investment

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Startups Backed by Venture Capital Are Big (Potential) Business

The discouraging rates of failure are nothing new, and yet the industry continues to grow with no end in sight. It doesn’t seem to matter, however, in terms of which businesses will realize success in the high-risk-high-rewards VC investment world. Many just want to get in on the ground floor of a potentially lucrative idea. However, a “unicorn” in the VC world (startups valued at over $1 billion), is as rare to come by as one is in your backyard.

TechCruch highlighted, “10 of the Most-Funded Startups to Fail in 2017” as proof that money isn’t everything when it comes to success. Startups backed by venture capital aren’t guaranteed to live long, if they live at all. For example:

  1. Beepi, shut down in February 2017, raised $148.95 million in 5 Rounds from 35 Investors [and is] “a textbook case of a startup with a good idea — a marketplace for people to sell and buy used cars, which would be vetted, processed and delivered to the new owner by Beepi, bypassing the costly overhead and commission structure of car dealerships. And there was some solid execution — strong customer service was a big selling point. But ultimately the company was run badly.”
  2. Yik Yak, a once-popular anonymous social network, “Shut down in May 2017, raised $73.5 million in 3 Rounds from 9 Investors. Apparently all the cyberbullies and unsavory content drove down the app experience for others. By the end of 2016, user downloads had declined 76 percent.”
  3. Juicero, inspired by the popular Keurig model, closed down in September 2017 in spite of raising $118.5 million in 4 Rounds from 17 Investors, a 16-month lifespan. Although, “The company managed to raise more than $118 million from prominent VCs like Google Ventures, Kleiner Perkins and even Campbell Soup Company, [they] suffered greatly from a Bloomberg article that revealed the company’s proprietary juice packs did not require the $400 machine and could be squeezed by hand.”

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Ghosh’s dismal 2012 numbers don’t gel with what the industry at large is saying in the PR spin and energetic hype of new ideas and innovations. In contrast to Ghosh, the National Venture Capital Association asserted five years ago that “Venture capital performance for the 10-year horizon continued its upward climb.”

The Unicorn Hunt Calls

So, who is right? Ghosh’s numbers may very well have been accurate back then, and they could serve as a cautionary tale to venture capitalists today, but are they still accurate now? It doesn’t really matter, actually. Abysmally high rates of failure for startups backed by venture capital aren’t going to scare investors away from continuing to invest in high-risk, rapid-growth startups. The potential for runaway success is just too alluring. Earlier in 2017, Forbes reported that corporate-level venture capital investments are still a really, really big deal.

Abysmally high rates of failure aren’t going to scare venture capitalists away from continuing to invest in high-risk, rapid-growth startups. The potential for runaway success is just too alluring

Five years ago, Huffington Post business blogger Faisal Hoque noted that when it comes to venture capital investments, money isn’t everything. When it comes to successful investing in venture capital, the apropos adage here is “Knowledge is power” more than “Money talks.”

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“In today’s volatile market, the success for a new venture is often driven by its ability to recognize significant challenges and immediately identify the strategic imperatives necessary to address, survive, surpass, and thrive despite them,” Hoque said.

He pointed out that, “The theory that in a numbers game, some will win and some will lose, is not an acceptable approach, especially when fund managers’ fees can reach in the millions while investments may result in massive losses.” At exit time (or liquidation) or critical mass, Hoque, who himself saw his VC-backed startup flicker out, said that conducting extensive due diligence before making all strategic decisions is critical in an unpredictable business environment.

The discouraging rates of failure are nothing new, and yet the industry continues to grow with no end in sight.

Entrepreneur contributor Patrick Henry noted that WHY these businesses fail verses the ones that succeed is often as unique as the company itself. Everything from poor management to a poorly executed good idea to poor timing in the market space. It happens- and it happens a lot. A 75% (sometimes higher) failure rate in the experimental treatment of an illness, or even invested in the mechanic fixing the family BMW would be considered generally unacceptable. Yet, in the venture capital world, it’s par for the course. Plus, when a VC investment it pays out, it pays out big. That potential, it seems, is enough to keep venture capital investors on the unicorn hunt.

About Alicia Purdy

Alicia Purdy is the Managing Editor of Columnists at FinancialPoise.com. She holds a Master's degree in Journalism and has spent over a decade working as a freelance writer and editor in finance, politics and government and business.

View all articles by Alicia Purdy »

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