4 ms·

Startup Failure Rates — The Real Numbers

13 points by drm237 18y ago

tptacek 18y ago
I can't find establishment starts and closings broken down by business type on the SBA site, but you could probably work that out pro rata by comparing California to, say, North Dakota, state-by-state. 50% of tech starts still in business 4 years later sounds crazy high to me. I'm not sure this is super relevant to YC get-rich-quickr's. Built-to-flip startups have a different lifecycle than small businesses in general; a small (read: "real") business grows more conservatively and lasts longer, and a flipper actually works to shutter itself early (on favorable terms).
- byrneseyeview 18y ago
  Built-to-flip is an interesting way to put it, since the companies you describe are very similar to individual employees -- productive, but not broad enough in scope to constitute a whole businesses. If that's what makes them built-to-flip, doesn't it apply to every lawyer, accountant, sales guy, or programmer who either functions as part of an infrastructure or can't function without one?
  - tptacek 18y ago
    A built-to-flip company is one that redirects investment (and risk management) away from building a business and into product development. A single-laywer law office doesn't do that. The "breadth" of the company has nothing to do with it. The question is how sustainable the company is as a business. You can trade long-term sustainability for short-term marketability --- Cisco and Google will love you for it, because they don't care about your business infrastructure (they're firing your director of finance as soon as they buy you) and they want your product to be maximally useful. On the other hand, if you miss the big acquirers and you're a flipper, you die; if you build a business, you get repeated shots at being attractive to them down the road.
    - byrneseyeview 18y ago
      Right. I don't see how this does not apply to, e.g., an engineer or graphic designer who could create a product but not sell it, or sell it but not create it. These people can't survive except as part of a big company -- and they get that way by either getting hired, or starting a built-to-flip startup and selling out. It seems like a false dichotomy, since these are two ways for the same people to do the same thing.
      - tptacek 18y ago
        I'm sorry, I just don't follow you. In any major city there are scores of independent solo graphic design and engineering firms. There are also scores of indie firms who design, manufacture, and distribute products. Built-to-flip startups are a special class of company who avoid most of the work of distribution, promotion, sales, and billing in favor of maximizing the investment value of their product. Again: if they thread the needle and sell that package to Cisco, they win. If they miss, they die.
        byrneseyeview 18y ago
        So your counterargument is that 1) there are firms that exist as part of the supply chain -- firms that, if they could not flip their services to bigger companies -- would not exist, and that 2) there are smaller companies consisting of employees with built-to-flip careers. I don't understand why you draw this arbitrary distinction between paying someone a fraction of your future cash flows (through stock) versus paying them a stream of cash.
pg 18y ago
These numbers are meaningless. These aren't startup failure rates, but failure rates for all small businesses-- i.e. shoe stores, restaurants, etc.
- projectileboy 18y ago
  Really? I thought it pointed out the survival rates for businesses started in 1992, no? And while the sample set probably includes very few (if any) software-based tech companies, I think there are more similarities than differences between the struggles encountered by two kids starting a tech company and two kids opening up a skateboard shop - bad hires, cash flow problems, finding customers, etc. What am I not seeing?
  - omouse 18y ago
    I think the difference is that it costs less to start tech company, at least in terms of physical goods. Little to no distribution cost, no need for physical space to store the goods, etc.
- johnrob 18y ago
  Also, plenty of startups die before ever incorporating. For example, some hackers crank out a prototype, never get traction, then bail - all without any paper trail.
  - danielha 18y ago
    There needs to be some line drawn to what is considered a startup. Incorporating is one of the bare minimums. Before that, it's called a startup idea.
sdurkin 18y ago
The idea that the number could be as high as 10% success makes me ecstatic. Considering the chance of being admitted to the grad or med school of choice, those odds sound pretty good to me.

13 points by drm237 18y ago

I can't find establishment starts and closings broken down by business type on the SBA site, but you could probably work that out pro rata by comparing California to, say, North Dakota, state-by-state. 50% of tech starts still in business 4 years later sounds crazy high to me. I'm not sure this is super relevant to YC get-rich-quickr's. Built-to-flip startups have a different lifecycle than small businesses in general; a small (read: "real") business grows more conservatively and lasts longer, and a flipper actually works to shutter itself early (on favorable terms).

byrneseyeview 18y ago
Built-to-flip is an interesting way to put it, since the companies you describe are very similar to individual employees -- productive, but not broad enough in scope to constitute a whole businesses. If that's what makes them built-to-flip, doesn't it apply to every lawyer, accountant, sales guy, or programmer who either functions as part of an infrastructure or can't function without one?
- tptacek 18y ago
  A built-to-flip company is one that redirects investment (and risk management) away from building a business and into product development. A single-laywer law office doesn't do that. The "breadth" of the company has nothing to do with it. The question is how sustainable the company is as a business. You can trade long-term sustainability for short-term marketability --- Cisco and Google will love you for it, because they don't care about your business infrastructure (they're firing your director of finance as soon as they buy you) and they want your product to be maximally useful. On the other hand, if you miss the big acquirers and you're a flipper, you die; if you build a business, you get repeated shots at being attractive to them down the road.
  - byrneseyeview 18y ago
    Right. I don't see how this does not apply to, e.g., an engineer or graphic designer who could create a product but not sell it, or sell it but not create it. These people can't survive except as part of a big company -- and they get that way by either getting hired, or starting a built-to-flip startup and selling out. It seems like a false dichotomy, since these are two ways for the same people to do the same thing.
    - tptacek 18y ago
      I'm sorry, I just don't follow you. In any major city there are scores of independent solo graphic design and engineering firms. There are also scores of indie firms who design, manufacture, and distribute products. Built-to-flip startups are a special class of company who avoid most of the work of distribution, promotion, sales, and billing in favor of maximizing the investment value of their product. Again: if they thread the needle and sell that package to Cisco, they win. If they miss, they die.
      - byrneseyeview 18y ago
        So your counterargument is that 1) there are firms that exist as part of the supply chain -- firms that, if they could not flip their services to bigger companies -- would not exist, and that 2) there are smaller companies consisting of employees with built-to-flip careers. I don't understand why you draw this arbitrary distinction between paying someone a fraction of your future cash flows (through stock) versus paying them a stream of cash.

pg 18y ago

These numbers are meaningless. These aren't startup failure rates, but failure rates for all small businesses-- i.e. shoe stores, restaurants, etc.

projectileboy 18y ago
Really? I thought it pointed out the survival rates for businesses started in 1992, no? And while the sample set probably includes very few (if any) software-based tech companies, I think there are more similarities than differences between the struggles encountered by two kids starting a tech company and two kids opening up a skateboard shop - bad hires, cash flow problems, finding customers, etc. What am I not seeing?
- omouse 18y ago
  I think the difference is that it costs less to start tech company, at least in terms of physical goods. Little to no distribution cost, no need for physical space to store the goods, etc.
johnrob 18y ago
Also, plenty of startups die before ever incorporating. For example, some hackers crank out a prototype, never get traction, then bail - all without any paper trail.
- danielha 18y ago
  There needs to be some line drawn to what is considered a startup. Incorporating is one of the bare minimums. Before that, it's called a startup idea.

sdurkin 18y ago

The idea that the number could be as high as 10% success makes me ecstatic. Considering the chance of being admitted to the grad or med school of choice, those odds sound pretty good to me.