Startup failure rate is too high – and it’s NOT OK!

News article version of startup failure article

Mashauri (Mashauri.org) is an organization with a mission to significantly increase the success rate of startups across the globe.

Infographic: startup failure rate is too high

They have written a number of articles about startup failure rates – and why Silicon Valley and others are not right in the accepted view that the majority of startups must fail and that failure is “good” because it is simply a learning experience.

Although they recognize that there will be failures and that it should be a learning experience, they believe that we can learn how to be better at launching and growing businesses – and in fact that we can learn from other founders’ success and failures and do a better job at developing viable businesses. They also claim that failure is far less of an option for many entrepreneurs than is the case in perhaps Palo Alto where funding is more plentiful and entrepreneurship is a choice, not the only option.

Mashauri have recently conducted an investigation into UK Government statistics where they have combined a number of databases to  paint a picture of what is the actual failure rate of new businesses and when are they likely to fail. There are good reasons for using these particular datasets and they believe that the learnings are translatable to other countries, although the results might need to be adjusted for local factors.

Their overall findings are:

  1. About two thirds of all businesses fail within the first five years
  2. Almost one third of new businesses never gain traction (ie receive income from customers or receive funding)
  3. We are not getting better at helping new businesses become successful– in fact we are getting worse

These are shown with the relevant charts in the infographic below.

The full article can be found at: Startup failure rate is too high.

Or click the link at: http://wp.me/p7JRbh-IW

The next article in the series is going to look at the “why” of failure and try to map this onto the “when”.

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The author, Simon Gifford, is CEO at Mashauri, Director of Genesis management Consulting and an adjunct professor at IE Business School in Madrid.

Startup failure rate is too high – and it is not OK!

1. Introduction

Peter Thiel likes the aticle

This is the second article in the series: Its not OK, where we try and bust the myth that 80% of new ventures must fail and that this ratio is fine. Our claim is that this level of failure is far too high and we can learn from the mistakes of others as well as our own failures. This may be a little controversial, so hopefully it will spark debate! (If Peter Thiel likes the article, it MUST be controversial).

Note: infographic at end of article

 


The 3 main conclusions we will cover, with data-driven support, are:

  1. About two thirds of all businesses fail within the first five years
  2. Almost one third of new businesses never gain traction (ie receive income from customers or receive funding)
  3. We are not getting better at helping new businesses become successful – in fact we are getting worse

Startups RIPNaturally, we do accept that there will be some failures and we also accept that fear of failure should not be a barrier to trying to develop a business. Please read our first article where we introduce the theme.

We believe the topic of “when do new businesses typically fail” will make for interesting reading for both entrepreneurs and those involved in the entrepreneurial world (such as investors, accelerators, incubators, universities, governments and corporate innovators). The article that will follow as to the “why” of failure will likely be of higher value, but it is necessary to build some sort of fact-based platform as to “when” to develop this. Our article is based on the UK data but we feel it is of value across the globe, although the conclusions will need to be adjusted for local factors.

It is worth mentioning that “success is in the eye of the beholder”. A Venture Capitalist (VC)  idea of “success” would be their investment in a very high growth company that exits; while an investment in a company that ends up surviving and providing a good lifestyle for the owners may be a failure to the VC, but the founders may be happy with their success. For the purpose of this article, a failure is a company that legally gets dissolved as the owners/authorities do not believe it is a going concern.

In this article we take a fact-based approach to getting to grips with startup failure rate and when failure happens. We have used multiple sets of statistics published by the UK government (Companies House and Office of National Statistics). The sources and detailed calculations are available in the appendix. Admittedly the data is messy: different sources, different start/finish dates, limited cohort information and rounding errors. However, on the positive side, we are dealing with big numbers (more than 600,00 companies were incorporated in the UK last year) and a year-to-year comparison reveals reasonable consistency. Furthermore we do not have to get to decimal place accuracy and so the data and conclusions can be considered reliable.

This is UK data (including Scotland, Wales and Ireland) and when considering other geographies, you may need to adjust for local factors. For now we consider, this to be fairly representative of the entrepreneurship failure rate in most developed economies – but the failure rates are probably somewhat higher in developing economies. In a subsequent article, we will use Global Entrepreneurship Monitor (GEM) data to see how we can assess for those differences

2. The evidence

2.1 Conclusion: almost two thirds of new businesses fail in the first five years

The two charts below show the data in different formats (source: UK Companies House).

The “Number of companies remaining” shows a cohort view – that is if 100 companies are launched at the same time, the number remaining at the end of each year is shown by the column (eg in year 3 only 56 would remain).

 

New business failure rates
How many companies remain 5 years after starting

 

The “Average failure rate” shows the number of companies that fail each year. For instance in the 3rd year, 16% of companies who started year 3 will have failed by the end of the year.

Its not OK average failure rate
Average failure rate of new businesses

The number failing in the first year does appear low to those who have helped prepare this article. Our logic is that there is a sort-of “honeymoon period” where founders cannot conceive they will fail (and so continue in the face of warning signs), and more importantly there is a delay in actually getting started and facing reality.

In the next article, we will spend more time on the “how” of failure.

2.2 Conclusion 2: more than 30% of new businesses never reach “traction”

A separate set of data from the UK Office of National Statistics (ONS) captures the number of companies that have registered to pay VAT or to pay tax on behalf of employees. Both these payments offer a reasonable proxy for “traction”, which we define as having paying customers or having received funding (which would normally mean a strong indication of paying customers or paying customers in the near future).

The number of tax paying companies as a proportion of all companies incorporated, is shown in the chart below. Over the last 5 years the proportion of companies gaining traction is steadily decreasing. Although we are launching more new businesses (which is partly due to the ease in which this is possible), we are not doing a great job of helping them learn how to reach the point of having paying customers – 3 out of 10 never achieve that goal!

30% of new businesses never reach traction
Many new businesses never even gain traction

 2.3 Conclusion 3: we are not getting any better at improving new business success rate

Despite the increasing number of new business starts, we are not getting any better at improving business success rate. The previous point above demonstrates this. However, there are two more sets of data that also give this statement credence. Below is a chart showing new incorporations and dissolutions by year. It is clear we are starting more businesses and we know that there is greater encouragement to do so; and it is far easier to do so. Despite this, the ratio of dissolutions to incorporations is deteriorating which would indicate that the survival rate is dropping – albeit net new numbers is increasing. If you throw enough infantry at the enemy, although many of the cannon-fodder will die, but some will get through!

Ratio of new and failing businesses
Ratio of new and failing businesses

A second number of interest is the number of acquisitions of more than £1 million that are occurring (source: ONS). Although the data is very “noisy” with many factors coming into play, we would hope for an increasing number of acquisitions that might indicate successful startup exits. However, if we compare the latest 5 years history with the prior 5 years we see a substantial decrease in this number. Although this data is inconclusive, it certainly does not show an increase in exits unless they are small – and that probably equates to acqui-hiring rather than a true acquisition. (Note: we recognise the imperfection of M&A data and the large amount of factors that play a role, but the trend is not positive over this period).

 

UK acquistions

 

 3. Conclusions

After considering all the 3 points above and merging them with what we know about the development of the entrepreneurial ecosystem and the life cycle of startups in general, we have arrived at some insights:

  • Most new businesses survive the first year simply though a delay between registering a company and real work beginning, together with the passion, excitement and initial perseverance that goes with the initial stages of a new venture.
  • Probably about 25% will steadily give up through years 2 and 3, as they conclude that they are never going to reach traction or not at a rate that will develop into a going and growing concern.
  • A further 30% to 40% will fail over years 4 to 6, struggling with some level of revenue that perhaps exceeds breakeven but is not sustainable and certainly will never scale into a large company.

To avoid painting too gloomy a picture, there will be 20%+ who do make it – they will develop into flourishing enterprises, perhaps grow extremely large (the occasional fabled unicorn) or may be bought out for good value multiples by other corporates. In addition, many (or some) of those founders who do fail will learn from their errors. A few will start again and with that experience, increase their chance of success the second time around.

Our view is that this failure rate need not be so high. Although there are multiple and often combined reasons for failure, surely with the volume of dissolutions in the UK alone we should be doing a much better job of increasing new business success? There has been exceptional work done by people like Steve Blank, Eric Ries and Noam Wasserman to name a few. Organisations like the Global Entrepreneurship Monitor also do amazing research into understanding what are the factors required for new business success. Clearly however, this is not trickling down to the founders themselves who lemming-like seem to be starting and failing at increasingly higher rates.

Mashauri believes that it is possible to learn from experience and use technology to codify processes and activities into a flexible system that can guide founders along the path to success and avoid at least the major pitfalls and unnecessary risks. We do not naively believe that every new business will be successful, but we are convinced that through the right focus, efficient use of resources, shared experiences and the occasional re-direction, a significant portion of potential “failures” could be turned into successes. And lets call out the elephant in the room: failure really sucks – especially when you bring down others with you. When your families suffer, those friends who invested in you lose their money, those few employees who trusted you are without employment  …..  getting slapped on the shoulder by some wealthy VC and being told not to worry and that it is a useful learning experience just somehow does not compensate.

Peter Thiel - failure is not great

I am not always a fan of the utterances of Peter Thiel (billionaire entrepreneur and philanthropist who founded payPal and was an early investor in Facebook), but in the case of startup failure we are in agreement. As he says:

“Every time a company fails it is not a beautiful working out of the Darwinian free market and it is not a fantastic educational experience for all involved. Every death is a tragedy and that is even true of deaths of companies.

“I don’t think that we should be setting people up for failure in all sorts of ways and that is something that should be avoided.”

The purpose of Mashauri is to make a difference to the success rate of new businesses across the globe. Our initial work has been to research entrepreneur failure (and success) and early stage founder requirements. We have run a beta site (Mashauri.com) for a number of years and helped various founders both online and offline. We are beginning to figure out how we can make a difference. It is likely that those startups selected by VC’s and the top accelerators have a higher than average chance of success (by nature of the competitive process if nothing more), but the vast majority of new businesses (probably in excess of 90%) do not fall into this elite category – and it is here that we believe we can make a difference. Learning from each other, understanding patterns of success (and failure), providing the right focus, encouragement and pace, using the tools that are available, providing critical training …. none of these will guarantee non-failure, but they will certainly increase the chances of success.

We are just launching this new site Mashauri.org, with a few acceleration programmes and soon-to-be training programmes. We admit that as it stands, the site is going to be creaky for a while and the programmes may not be overly sexy – but this is just the beginning and an extension of our earlier learning process. Future moves include using Mashauri information linked to other sources, to use big data to gain better understanding patterns of success and failure. Then supporting the process with AI-enabled mentors to help scale the system at a truly global level.

If you care about this as we do, it would be great if you could spread this article wider and help us to engage with other people who are also concerned about startup success – and can join us in our quest to make an impact in the world of new business.

Watch out for our next article where we will build on this one and start to discuss why and how failure happens. This is even a more complex subject with even less reliable data. However, we will tap into the excellent work of organisations like the Kauffman Foundation, the Global Entrepreneurship Monitor and we will rope in some real gurus on the topic to work with us on these hypotheses . Peter Thiel: are you available?


Thanks to contributors to this article, especially Apoorv Bamba, Guy Harris, Peter Quinlan and Peter Bryant.


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Infographic: startup failure rate is too high


 

#Sucessful startups case studies: Teespring

Teespring announcement

The story from the founder ……

“Just over nine months ago, armed with a few beta users and a short wait list, we launched Teespring to the world. The concept was simple: Kickstarter for custom t-shirts. Instead of dropping thousands of dollars to get your tees screen printed and trying to figure out how to get them to your buyers, all you had to do was come to Teespring, design your tee, set a goal (the higher the goal, the cheaper the price per tee), and launch the campaign.Teespring T shirts
Buyers could come to your campaign and pre-order your tee, and once you reached your goal we’d handle the production and fulfilment and send you a check for the profit.

We had big dreams of Techcrunch articles and explosive growth. We’d poured ourselves into this, people were sure to be blown away and it wouldn’t be long before they’d be sharing it with their friends. It was only a matter of time.

The reality was far less exciting. No one was interested in covering our launch, only a small percentage of the waiting list opened their invite email, and traffic was the same as it had been the day before. It was time to face the truth: There would be no overnight success for us, we’d have to grind it out.”

Teespring now has multi-million dollar revenues and although success has come quite quickly, it has not been without hard work and the normal “entrepreneurial roller-coaster”. What are the lessons to be learned:

On a positive note:

  • They really understood the problem they were solving – as it was a problem they faced.It is always critical to have a clear idea of the need your venture is fulfilling (in fact it may be THE most critical aspect); but it is often best if you have first-hand experience of the problem. If you do not – it is always a good idea to go and get that experience.
  • They got a product up and operational in a short time. They proved it worked and then developed from there. This is also classical start-up thinking -do not try and develop a solution with all the bells and whistles at first cut – you will only have to redo it all later when you have more user experience to guide you.
  • Although they had a good start, they recognised the need for help and signed up to an accelerator (Y Combinator) as they recognised they were missing skills and networks. This is a great lesson for entrepreneurs in general who have a tendency to try and do everything themselves. It may be possible, but it will slow you down.

On a more challenging note:

  • Although the product was good and met a real need – it still had to be actively sold. The founders did an excellent job at speaking to a wide range of prospective buyers to understand what was required to make it something that was easier to buy. They finally realised it was the in-web design tool that was the critical issue (and the most difficult to develop)
  • It was a long haul. They pushed and hustled and generated leads but nothing seemed to allow the site to get its own momentum, until suddenly there was a magic moment when it started getting easier. Campaigns began to commence organically and new users arrived who had not been cajoled to join. The owners put it down to a critical mass  of effort that eventually started paying off.

The Teespring tipping point

 

So – in summary, what are the lessons:

  • Really understand the problem or need – and keep increasing your knowledge of it.
  • Get a product out there quickly and then refine based on user needs
  • Recognise where and when you need help- and go and ask for it
  • Push hard and keep persevering – even when things look dark, you may be inces from the tipping point.

Mashauri has been designed as a web-based accelerator and training resource that is focussed on assisting entrepreneurs moving along the start-up path. Although the effort is going to be yours, we can support you in reaching the stars through our tool-set, process and real live mentors. Have a look around the site for more information.