“Nine out of ten startups fail.”
If you work in tech, you’ve heard the statistic. But is it true?
The claim that 90% of startups fail is accurate over a ten-year period and supported by multiple studies within seven percentage points. The claim refers specifically to venture-backed startups, and defines failure as any result less than a 10X investor return on capital over ten years.
Startup closure statistics1 from outside the US are roughly equivalent to the 90% rule2. However, the sample size in this case is much smaller. As of 2021, about 70% of all venture capital investments are within the United States.3
Across all industries, Census Bureau data shows business success rates ranging from 30–50%. The failure rate across all business formations by the Bureau of Labor Statistics is just over 50%, accounting for a five-year timeline.4
Most measures of business failure rates consider anything short of closure to be a success, including scenarios traditionally frowned upon in the venture capital ecosystem like linear growth trends and “acqui-hire” exits.
| Business Type | Failure Rate | Time Frame |
|---|---|---|
| New Business | 70% | 10 years |
| Startup | 90% | 10 years |
| Scaleup | 75% | 10 years |
| Unicorn | 99.9% | 10 years |
Startup vs Business definitions impact the success rate
Depending on where you look, you will get different definitions of what a startup is.
According to Forbes, a startup is a new company that uses innovation to create a new product or service that disrupts an industry.
Eric Reis, the author of The Lean Startup, defines it as “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.” Startup Commons defines a startup as a team of entrepreneurs who develop innovative businesses with fast growth potential and scalability.
The common high-level themes in startup definitions are:
- Innovation
- New product or service
- Fast growth
- Disruption
- Scalability
Even with this deep dive into what a startup is, some clarity emerges, but more complexity is added. For example, who defines what innovation is? You can probably assume that the tenth branch of a franchise may not be a startup by these definitions, but I am sure that every potential startup founder thinks that they are innovating with the potential for fast growth. The market may or may not agree with that assumption.
Another grey area is, how long does a young, innovative company stay a startup? In some instances, the generally accepted startup classification ends after five years. However, in other sources like OECD.org, a startup becomes a scaleup after three consecutive years of 20% averaged annualized growth.
This is additionally complicated by investement level. A SaaS startup that’s taken on significant 8–figure investment and diluted founder shares down to single digits might consider stable 7-figure ARR (Annual Recurring Revenue) to be a company-ending failure. A smaller startup that bootstrapped or raised more modest seed funding might consider the same outcome to be a huge success.
Startup failure rates vary for startups, scaleups, and new businesses
The difference between these three types of business is a crucial differentiator for risk percentages. I will go into more detail about how these differ and why that matters.
1. New businesses: 70% failure rate
Generally, government statistics include all new businesses in the startup category. These could consist of new franchises, a barbershop, or a florist.
So, yes, they are initially small and new companies — but they do not necessarily have disruptive or compound growth options.
For US businesses, the Bureau of Labour releases the most granular annual datasets. According to 2020’s results, the failure rate for US-based businesses is only 20% in the first year (and that includes restaurants!).
This failure rate jumps to 50% at the end of year five, and close to 70% in year ten. This is roughly consistent with the 40–60% range seen in international studies on five-year cycles, although data from non-OECD countries tends to be less granular.
Note that US companies do not necessarily have US founders. The US is a popular destination for ambitious startup founders in other markets, who view US company formation as a path with more investor access. Services like Stripe Atlas and Clerky serve this market with help setting up legal paperwork, formation papers, and bank accounts.
2. Startups: 90% failure rate
For companies classified as startups due to their innovative and potentially disruptive product, the failure rate is much higher. This is because, in their ideation phase, they have not yet reached their growth stage or even determined product fit.
Here is where the ‘9 out of 10 startups fail’ statistic becomes more relevant. The exact origins of this stat are not clear, but Startup Genome’s 2019 report states that only 1 in 12 entrepreneurs succeed in building a successful business. Although different figures, this is pretty much in line with the original quote at about a 10% success rate.
3. Venture Capital funded scaleups: 75% failure rate
In addition, Venture Capital failure stats tend to include only startups that VCs have invested in. As these companies are usually past the ideation phase and in their growth phase, they are referred to as scaleups by the startup industry. The product-market fit has already been established, and much of the ideation phase high risk has been survived. An often-quoted but older statistic from research done by Shikhar Ghosh (2012) of Harvard states that 3 out of 4 VC-backed businesses fail. So, 75%.
This stat may be different in 2021, but precise national figures are challenging to track down. Essentially, it is a reasonably high-risk investment for any venture capitalist, but the gains from high-growth companies that succeed hopefully outweigh the losses from those that don’t.
It quickly becomes apparent that definitions of a startup differ between data sources, so various failure percentages are claimed. Since no one is comparing like with like, it is complicated to give an all-encompassing figure of failure rates. A 9 out of 10 startups fail claim is valid for startups within a specific definition of the term but doesn’t give you the complete picture for scaleups or even normal new businesses.
Probably the closest answer is that starting your own business is relatively high risk, whether that business is a startup or not. However, this leads to another element that people disagree about.
4. Unicorn companies: 99.9% failure rate
Among all startups, companies that consider unicorn status of a $1B+ valuation to be success are exceedingly rare, at 0.00006. Only a fraction of a percent of all startups make it to this tier.
How are success and failure defined?
The next questions to ask are how success or failure are defined. Is failure the closure of the startup? Is success achieving above a certain average of annual growth over a minimum number of consecutive years? Is success or failure the same for a founder, investor, and talent team? Let’s take a look at a more granular level.
1. Startup closes down
This failure definition is one that everyone can agree on as counting towards a failure in the stats. If a business ceases to trade or exist in any form, it is unlikely to be classified as anything other than a failure. From a return on investment point of view, it may not show any actual returns. For talent teams, it means job loss. For founders, it is often the end of their great idea. The culture of startup failure post mortems has added an angle of productive group learning from failure rather than a total dead end. Still, in most other respects, this scenario counts towards a failure stat.
2. Startup gets Acqui-hired
One form of acquisition is the acquisition of a startup’s talent rather than their actual product. These acquisitions do not necessarily exclude the product; instead, they are primarily driven by gaining access to the talent that works there. Acqui-hires were around for at least as long ago as Google’s acquisition of Milk or the Facebook and Lightbox deal in 2012.
Is this a failure? That depends. For companies that have already failed or stalled, Acqui-hiring can benefit everyone from buyers to investors to founders and talent teams. In a normal Acqui-hire situation, the company in question has not been shooting out the lights in terms of revenue or market traction. The buyer is essentially after post-closure talent retention. The avoidance of the cost, effort and time required to establish high-performance teams would make the deal worthwhile. The investors may get paid in stock from a fast-growth private company and meet their expected returns and time frames after all. Founders may also get paid in cash or stock from a hot, high-growth private company or a more slow-growing corporate. Either way, their relative failure would be financially mitigated. Talent teams, depending on the offer, might get shares and keep their jobs.
For companies in their early-stage or even successful post-investment stage, investors’ outcomes and sometimes those for talent are more mixed. In these cases, an Acqui-hire may be less of a failure for the founder than anyone else. The legalities and loyalties involved in these situations are well beyond the scope of this article,
What counts as success for Venture Capitalists?
Here again there are various opinions on what defines success. Ventureburn reports that Venture Capitalists expect a 10X return over five years on their investment of funding a year or two of a scaleup’s costs. Some VC funds like Angelhub Ventures in Stellenbosch claim to be generating the growth to meet these requirements across their six successful investments.
Other figures are lower at 3X over 10 years to ensure a good investment. According to Gil Ben-Artzy, only 5% of startups are generating these kinds of returns.
So, your scaleup may not fail in that it closes down and ceases to do business, but it may not provide the required growth or returns to justify the capital invested. Is this a failure? The answer is probably leaning towards yes for the Venture Capitalists or funders.
Generalizations versus specifics
For an ideation phase business that meets the definition of a startup, a roughly 90% failure rate is in line with recent stats from Startup Genome, a reputable published source. For general new companies with linear growth models, the failure rate is less than this, even over five years. However, in terms of scaleups that have received VC funding, the statistic improves again thanks to the infusion of cash and expertise from advisors.
Another factor to consider is the time frame. Regular businesses may be measured by success or failure in a specific number of years of operation. On the other hand, startups and scaleups are probably more accurately measured by failure or success in a particular phase. So, it is difficult to put together a statistic covering all types of new businesses and their failure rate with any level of accuracy.
The outcome of taking a closer look at this well-known and often cited stat is that as an entrepreneur, it is unlikely that you are going to know the exact probability that you will succeed or fail. Even as an investor, there will be a certain amount of unpredictability in determining whether a scaleup will follow or even return the optimal X10 over five years.
How to improve your chances above 10%
Observe the following to increase your chances of success in a startup venture:
- Engage experienced advisors early
- Don't discount sustainable growth curves
- Consider the exit plan before starting
- Reduce your burn rate by using offshore talent
FAQs
Is it true that 90% of startups fail? ›
The reality is that 90% of startups fail. From budgeting apps to legal matchmaking services, businesses across every industry see more closures than billion-dollar success stories. And a whopping 10% of startups fail before they reach their second year.
Is it true that 9 out of 10 startups fail? ›Within their first five years of operation, 9 out of 10 startups fail. This truth doesn't reflect startups' lack of ingenuity and hard work, but rather an inability to nail down fundamental practices.
Do 95% of startups fail? ›According to a CBS Insights study, 95 percent of start-ups fail, and 42 percent of them fail when they realize there is no market for their product or service.
What is 80 percent of startups that fail? ›According to the latest data, up to 90% of startups fail. Across almost all industries, the average failure rate for year one is 10% However, in years two through five, a staggering 70% of new businesses will fail.
Why do 90% of entrepreneurs fail? ›Marketing mistakes were the biggest killers, and the biggest problem by far is lack of product-market fit. Don't invest a lot of time and resources before you are confident people want what you are offering. Validate your assumptions quickly and cheaply, and if needed - pivot.
Why do more than 90% of the startups fail globally? ›The major reason is due to the replication of Western business models, and not lack of subsequent funding from the investors.”
Do 99% of businesses fail? ›99% of people who venture into entrepreneurship inevitably fail within their first 5 years. Although there are new technological advancements every day, breeding new waves of opportunity, these statistics never seems to decrease.
What is the fail rate of startups? ›Whether it's bad luck, bad timing or a half-baked business model, there are any number of ways a startup can go wrong. And roughly 20% of new businesses fail within their first year, according to data from the U.S. Bureau of Labor Statistics.
Are 92 of startups successful? ›What is Entrepreneurship? – In a study of about 3200 startups in the silicon valley, about 92% of startups failed within the first 3 years of starting.
Do 65% of startups fail because of team issues? ›In his book, The Founder's Dilemma, best-selling author and Harvard Business School professor Noam Wasserman claims that 65% of high-potential startups fail due to conflict among co-founders. A daunting statistic to be sure, but it comes as little surprise to anyone who has ever tried to start a business.
What is the 82 percent of small businesses that fail? ›
82% of small businesses fail due to cash flow problems. And while most small business owners agree cash flow is the #1 risk for small businesses, cash flow is also a blanket term – a symptom, if you will – of several underlying causes.
Why only 1 percent succeed? ›The 1 percent know people like to buy the best products and services possible. So they make it their goal to be the best and produce the best. You are going to have a hard time producing the best products and services if you, personally, are not the best. So if you're not the best, don't focus so much on your work.
What is the success percentage of start up? ›Almost 90 per cent of start-ups fail across the world with 10 per cent failing within the first year.
Why do startups fail percentage? ›Startup Failure Statistics
42% of startup businesses fail because there's no market need for their services or products. 29% failed because they ran out of cash. 23% failed because they didn't have the right team running the business.
A major reason why companies fail, is that they run into the problem of their being little or no market for the product that they have built. Here are some common symptoms: There is not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing.
Do most entrepreneurs fail or succeed? ›“At some level, almost all entrepreneurs fail,” Demas told Business News Daily. “But at the same time, there is a notion that an entrepreneur can't fail because failure is part of the learning experience, and from those experiences, the entrepreneur builds a business with a higher likelihood of success.”
What percent of entrepreneurs fail? ›Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.
Is it true that most successful entrepreneurs have failed at some point? ›The fact is, while there are an infinite number of ways that successful entrepreneurs make their money, there's only one thing they all have in common: failure. There's no shortage of examples of great successes who had to struggle before they became the winners we now know them as.
How do you avoid being part of 90% of failed companies? ›- Define the problem and understand your customers. “Most successful founders are driven by impact rather than experience or money.” - ...
- Assess the market and be open to changing plans. ...
- Assemble a great team and learn constantly. ...
- Scale wisely and avoid burnout.
The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.
Is it true that many small businesses fail every year? ›
Key findings. 18.4% of private sector businesses in the U.S. fail within the first year. After five years, 49.7% have faltered, while after 10 years, 65.5% of businesses have failed.
Do 90% of businesses fail? ›Startup Failure Rates
About 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.
However, it is estimated that around 90% of startups in India fail within the first five years of their operations. This failure rate is largely due to factors such as a lack of market fit, insufficient funding, and intense competition.
How long do most startups last? ›The average startup lasts between two and five years.
On average, 90% of startups survive one year. 69% of small businesses survive two years. However, only 50% of startups will survive five years.
Carry out market research
Many assume that lack of funding or the wrong team are the main reasons behind business failure. However, planning and research are crucial when it comes to ensuring your business idea is feasible, your pricing is competitive and you will receive an adequate return on investment.
Nine out of ten startups will fail. This is a hard and bleak truth, but one that you'd do well to meditate on. Entrepreneurs may even want to write their failure post-mortem before they launch their business.
What happens if you fail a startup? ›The Consequences of a Startup Failure
The most obvious consequence is financial. Startup founders often invest significan't amounts of their own money, as well as raising funds from investors. If the venture fails, these funds may be lost, leaving the founders in considerable debt.
In fact, the 90/10 Rule tells us that during small business startups, 90% of your time should be spent on direct marketing activities and only 10% on building technical skills. The type of small business startup activities to spend 90% of your time on include: Prospecting. Lead generation.
Are 90% of the startups are successful within the first three years of starting? ›With the Startup Genome Report citing that within three years, 92% of startups fail, maybe there's something to learn before jumping into your own company.
Are only 23 of 100 startups profitable? ›According to data shared by data analytics firm Tracxn Technologies with Moneycontrol, only 23 of the 100 unicorns, or startups valued at $1 billion or more, have managed to achieve profitability for a financial year.
What are the three most important startup issues? ›
The Challenge of Getting Started. All new businesses face challenges, some more difficult than others. But there are three challenges that are common to all startups: getting started, building momentum, and scaling up. The biggest challenge for any startup is simply getting started.
What percent of startups become unicorns? ›While it's not impossible, attaining unicorn status can be incredibly difficult. In fact, a business only has a 0.00006% chance of becoming a unicorn, and it takes an average of seven years for nascent startups to grow into unicorns.
What business has lowest failure rate? ›- Real Estate. “90% of millionaires got their wealth by investing in real estate.” – ...
- Self Storage. ...
- Trucking. ...
- Vending. ...
- Laundromats. ...
- Senior Care Centers (Healthcare) ...
- Bad operational management. ...
- Bad financial management.
What Is the Small Business Failure Rate? 20% of small businesses fail in their first year, 30% of small business fail in their second year, and 50% of small businesses fail after five years in business. Finally, 70% of small business owners fail in their 10th year in business.
What is the #1 factor to success? ›The third was attitude. The study results pointed out that knowledge and skills only amounted to 15% of the reason for success. The #1 most important attribute for success was attitude. A combination of self-expectation and personal beliefs was 85% of the reason for success.
What percentage of people are actually successful? ›The Standard Success Rate is 10 Percent.
Does the 1% have 90% wealth? ›Their findings show that wealth is very concentrated: The top 1% holds nearly as much wealth as the bottom 90% and the “P90-99” class. However, inequality has grown less dramatically than other widely-cited estimates suggest and wealth is less concentrated among the very rich (the 0.1%) than many believe.
What is the real reason most startups fail? ›A major reason why companies fail, is that they run into the problem of their being little or no market for the product that they have built. Here are some common symptoms: There is not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing.