10 ms·

Startup Mortality Rates

56 points by felixbraun 2y ago

gmuslera 2y ago
Black swans and the Lindy Effect both play here. Sometimes hitting big with an startup more than compensate the loss of the failed ones. And odds of staying out increases with surviving time. It is not totally random that this happens, but maybe for a lot it could be only noticeable on hindsight.
jedberg 2y ago
In my own experience, it seems like the ones that provide frequent investor updates on a regular schedule are the ones that are most successful. There's almost a direct correlation between how often I hear from a company and how successful they are. It's probably related to the fact that providing monthly investor updates forces a regular cadence of accountability. There is also a significant time factor involved. The longer a startup has been alive, the more likely it is to have a bigger exit. Startups that go to zero tend to do so fairly quickly. And startups that end up 10x take quite a while to get there (YouTube would be a major exception to this, reaching 1.6 billion in just 1.5 years). The harder to predict ones are the ones in the middle. The less than 1x returns could happen quickly or take a decade.
- Lionga 2y ago
  You switch cause and effect, all of that is the other way around. Startups give frequent investor updates if things go well. Startups are alive longer if things go well. Things going well is the cause, not the other way around.
  - jedberg 2y ago
    I don't think I have switched them. I get plenty of negative investor updates. But those updates also include solutions and asks for help. Especially when it is a company that regularly sends an update on the same day every month. Those aren't always rosy.
    - nostrademons 2y ago
      You get negative but fixable investor updates. When you have unfixable business problems (which are usually along the lines of "Nobody wants our product", "Our founding team doesn't care anymore", "There is no reason for our company to exist", or "We can't possibly make the economics work"), then those are the startups that tend to go dark.
      - aprilthird2021 2y ago
        But those, can be fixed if addressed early enough by a pivot, a shakeup in leadership, business model change, etc.
      - themanmaran 2y ago
        I think the only truly unfixable problem here is "Our founding team doesn't care anymore". Plenty of companies have made successful pivots, even later stage. It gets harder and harder the larger you grow of course, but it's always possible. Most startup deaths come from a lack of motivation. Everything else is a side effect of that.
      - jedberg 2y ago
        Well yes, if they are sending me investor updates once a month and then stop, that's bad. But usually before they stop, the updates at least have a list of problems, and if there is a fix we can work on it together I can help them find someone who can. The point is, if you hold yourself accountable to your investors for an update once a month, you're also holding yourself accountable to yourself and your team to track those things and adjust.
- borski 2y ago
  > Startups that go to zero tend to do so fairly quickly. I wish this were true. Far too many founders are willing to stick it out in hopes that if they just keep building, sales will come. Of course, it doesn't, so they waste a decade on what could have been two years.
  - icedchai 2y ago
    I've seen this a few times, also. There's hope that the big sale is only another month or two out. More often than not, it never happens. Meanwhile, small sales happen, they trickle in, but nothing that moves the needle. Pretty soon you waste 5 to 10 years.
  - jedberg 2y ago
    Those are the ones that usually have a less-than-1x-but-not-zero exit though. They make enough to stay alive and eventually throw in the towel. Doesn't always happen that way of course, but from what I've seen, the zero exits are the ones that burned hard quickly and then couldn't get more funding but never found any PMF.
- throwa9724567 2y ago
  I sold a startup for $1B in a few years and never sent an investor update. YMMV.
  - jedberg 2y ago
    Firstly, I never said it was always true, and secondly, I have a really hard time believing you, because at least every VC I've ever worked with asks their startups for an update every three months. I find it really hard to believe you got to a $1B valuation without ever having anyone ask you for an update.
    - FreakLegion 2y ago
      I have five institutional investors and none of them have ever asked for updates. There isn't much point before Series B, since good early-stage investors are actively involved with the company anyway. Back in our Seed days we sent out monthly updates to everyone, angels included, but now we don't. That's what board meetings are for.
      - jedberg 2y ago
        Exactly. You sent regular updates and then had board meetings with regular updates. They probably never asked because you were already providing it.
        FreakLegion 2y ago
        Only two of those institutional investors have board seats. The other three don't get formal updates and don't have information rights. My point was that they didn't ask because they were good investors and actively involved with the business, so they already knew what was going on.
        jedberg 2y ago
        Right, and my point was that you had someone to be accountable to on a regular basis, so it helped keep you motivated and on track to produce results to report.
- baxtr 2y ago
  What is the best format for an investor update that you’ve seen? Or: what are the main KPIs you’d like to see?
  - jedberg 2y ago
    Most of the good ones start with their most current blurb "we make X for Y", which helps me remember who they are and also makes sure I'm on message when I talk to others about them. Then it has runway and burn rate (how long will they still be alive if nothing changes). Then it has KPIs that matter to their business, usually the ones they are tracking for themselves. Monthly active users, change in daily actives, number of widgets produced, etc. Then sometimes a hiring plan. If they tell me who they are looking for I can sometimes help. Then highlights, lowlights, and asks. Those are usually the best ones because it means they are tracking these things and it also means if there is a place where I can help I can get it from the investor update.
- deleted 2y ago
  [deleted]
- jonbishop 2y ago
  Aren't investor updates easier to send out when things are going well?
  - jedberg 2y ago
    I think a lot of people are missing the point. When the company first gets funded, things are always going well. Companies that establish a cadence of monthly investor updates at that time tend to do better because they know that in one month they need to have something to put in the update, so they work towards that.
m1n7 2y ago
- 25% of investments make zero return (i.e. 100% write offs) - 25% produce a return greater than zero but less than 1x (i.e. are losses) - 25% produce a return between 1x-3x - 15% produce a return between 3x-10x - 10% produce a return of 10x or greater If you bucket the first two as "zeros" or near zeros, the third one as "something you wish you hadn't invested in" and the last two as good investments, you get to roughly the same 1/3, 1/3, 1/3 that I like to use. so breaking even is bad all of a sudden... and who needs a return greater than 0-1x when everyone's getting paid and you have a little on the side for emergencies?
- drewcoo 2y ago
  > you get to roughly the same 1/3, 1/3, 1/3 that I like to use But your numbers are 1/2, 1/4, 1/4. I think you're being a bit optimistic.
  - fhdsgbbcaA 2y ago
    People worry about food being stuck in their teeth, saying the “wrong” thing by mistake, and a million other faux pas. If I confused 50% and 1/3rd in public I’d be mortified.
- afavour 2y ago
  Welcome to the world of VCs. And, honestly, business in general the last decade or so. It feels very much like building a sustainable business is frowned upon. Build big and build fast so that you can cash out at max value, or just crash and burn. It’s why your password manager can’t just be a password manager, it’s a subscription security product. Your cloud storage can’t just be storage, it has to be a more expensive document management system. So on and so forth.
  - jschveibinz 2y ago
    It's not that building a sustainable business is frowned upon. But if you raise money from investors using a traditional note or equity purchase, then you have created the need for an exit. There are royalty-based options for raising money: you take money in return for an annual royalty payment for a fixed number of years plus repayment. It's similar to debt.
a1371 2y ago
One might look at this and think "huh 30% success is not too bad" missing the fact that this is from a VC perspective. From a founder perspective, this is abysmal because the chance of you getting funded by the likes of a16z or YC is already really slim, about 1% according to YC. So let me ask you something: would you embark on a journey if you knew your chance of success is 0.3%? So many good startups go to oblivion, pandering to the VCs. Where they could have been more resilient on their own.
- beau_g 2y ago
  There's more success metrics to take away from a startup than just sticking around and creating a 3x or greater monetary return from an initial arbitrary valuation. If you were funded, you were getting paid something, if you were attempting something VCs funded, you were most likely trying something on the cutting edge in which case you are sure to have learned something novel in the space you will most likely to continue to work in. Consider going to work for any other company, let's say a publicly traded one for simplicity - if you work there for 5 years, and the stock price stays flat adjusting for inflation, is whatever you did objectively non successful? Of course not, in this case you would judge your success based on what you shipped + your own career growth. I don't see why you should look at it any differently from a founder or early startup employee perspective in retrospect (though believing this before starting is probably not healthy as if you believe in the VC recipe you should really be abiding to success as a forcing function). For 100% bootstrapping to avoid "pandering to VCs", your success metric is narrower (you have to achieve monetary success in a rigid, often short, timeframe) and your risk threshold is lower thus the successes on the learning side/pushing tech forward are less likely.
- condiment 2y ago
  It’s disingenuous to claim that the success rate is .3%. The success rate for the first stage (pre-vc) of venture might be one percent, and the success rate for the next stage (post) is 10 to 25%, depending on how a founder perceives success. These rates are independent. You can’t aggregate them because the level of effort to secure VC funding is very different from the level of effort required to take a funded start up to unicorn heights. If I understand your argument to be that startups are relegating themselves to the trash bin because they’re attempting to get attention from venture capitalists at the expense of some fundamental “goodness”, some data supporting that point would be helpful. But that’s not what’s in the article.
stanleykm 2y ago
I havent been involved in startups in a number of years but at the time when i was the trend was to give a bunch of 20-somethings with an interesting product idea a few million dollars and let them have at it. I wondered then and I still wonder if early stage investors would see better returns if they provided a little more boots on the ground support through either getting an adult into the room or training or whatever.
- Etheryte 2y ago
  Well that's kinda the whole idea of Y Combinator, isn't it? Sometimes you really do need to be blind to all the pitfalls to take your lucky shot at it, but adding some prior experience into the mix can help you not shoot yourself in the foot along the way.
osigurdson 2y ago
I'm wondering if the investment size is normalized here? I.e. are these all ycombinator like $500K investments or is there wide range? If there is a considerable range, is there any correlation to investment size?
nitwit005 2y ago
Those numbers seem like fairly vague estimates, and they are only for companies they chose to invest in.
fhdsgbbcaA 2y ago
50% != 1/3.
mdale 2y ago
At first I thought this article was going to be a about life expectancy for startup workers vs other companies

56 points by felixbraun 2y ago

Black swans and the Lindy Effect both play here. Sometimes hitting big with an startup more than compensate the loss of the failed ones. And odds of staying out increases with surviving time. It is not totally random that this happens, but maybe for a lot it could be only noticeable on hindsight.

jedberg 2y ago

In my own experience, it seems like the ones that provide frequent investor updates on a regular schedule are the ones that are most successful. There's almost a direct correlation between how often I hear from a company and how successful they are. It's probably related to the fact that providing monthly investor updates forces a regular cadence of accountability. There is also a significant time factor involved. The longer a startup has been alive, the more likely it is to have a bigger exit. Startups that go to zero tend to do so fairly quickly. And startups that end up 10x take quite a while to get there (YouTube would be a major exception to this, reaching 1.6 billion in just 1.5 years). The harder to predict ones are the ones in the middle. The less than 1x returns could happen quickly or take a decade.

Lionga 2y ago
You switch cause and effect, all of that is the other way around. Startups give frequent investor updates if things go well. Startups are alive longer if things go well. Things going well is the cause, not the other way around.
- jedberg 2y ago
  I don't think I have switched them. I get plenty of negative investor updates. But those updates also include solutions and asks for help. Especially when it is a company that regularly sends an update on the same day every month. Those aren't always rosy.
  - nostrademons 2y ago
    You get negative but fixable investor updates. When you have unfixable business problems (which are usually along the lines of "Nobody wants our product", "Our founding team doesn't care anymore", "There is no reason for our company to exist", or "We can't possibly make the economics work"), then those are the startups that tend to go dark.
    - aprilthird2021 2y ago
      But those, can be fixed if addressed early enough by a pivot, a shakeup in leadership, business model change, etc.
    - themanmaran 2y ago
      I think the only truly unfixable problem here is "Our founding team doesn't care anymore". Plenty of companies have made successful pivots, even later stage. It gets harder and harder the larger you grow of course, but it's always possible. Most startup deaths come from a lack of motivation. Everything else is a side effect of that.
    - jedberg 2y ago
      Well yes, if they are sending me investor updates once a month and then stop, that's bad. But usually before they stop, the updates at least have a list of problems, and if there is a fix we can work on it together I can help them find someone who can. The point is, if you hold yourself accountable to your investors for an update once a month, you're also holding yourself accountable to yourself and your team to track those things and adjust.
borski 2y ago
> Startups that go to zero tend to do so fairly quickly. I wish this were true. Far too many founders are willing to stick it out in hopes that if they just keep building, sales will come. Of course, it doesn't, so they waste a decade on what could have been two years.
- icedchai 2y ago
  I've seen this a few times, also. There's hope that the big sale is only another month or two out. More often than not, it never happens. Meanwhile, small sales happen, they trickle in, but nothing that moves the needle. Pretty soon you waste 5 to 10 years.
- jedberg 2y ago
  Those are the ones that usually have a less-than-1x-but-not-zero exit though. They make enough to stay alive and eventually throw in the towel. Doesn't always happen that way of course, but from what I've seen, the zero exits are the ones that burned hard quickly and then couldn't get more funding but never found any PMF.
throwa9724567 2y ago
I sold a startup for $1B in a few years and never sent an investor update. YMMV.
- jedberg 2y ago
  Firstly, I never said it was always true, and secondly, I have a really hard time believing you, because at least every VC I've ever worked with asks their startups for an update every three months. I find it really hard to believe you got to a $1B valuation without ever having anyone ask you for an update.
  - FreakLegion 2y ago
    I have five institutional investors and none of them have ever asked for updates. There isn't much point before Series B, since good early-stage investors are actively involved with the company anyway. Back in our Seed days we sent out monthly updates to everyone, angels included, but now we don't. That's what board meetings are for.
    - jedberg 2y ago
      Exactly. You sent regular updates and then had board meetings with regular updates. They probably never asked because you were already providing it.
      - FreakLegion 2y ago
        Only two of those institutional investors have board seats. The other three don't get formal updates and don't have information rights. My point was that they didn't ask because they were good investors and actively involved with the business, so they already knew what was going on.
        jedberg 2y ago
        Right, and my point was that you had someone to be accountable to on a regular basis, so it helped keep you motivated and on track to produce results to report.
baxtr 2y ago
What is the best format for an investor update that you’ve seen? Or: what are the main KPIs you’d like to see?
- jedberg 2y ago
  Most of the good ones start with their most current blurb "we make X for Y", which helps me remember who they are and also makes sure I'm on message when I talk to others about them. Then it has runway and burn rate (how long will they still be alive if nothing changes). Then it has KPIs that matter to their business, usually the ones they are tracking for themselves. Monthly active users, change in daily actives, number of widgets produced, etc. Then sometimes a hiring plan. If they tell me who they are looking for I can sometimes help. Then highlights, lowlights, and asks. Those are usually the best ones because it means they are tracking these things and it also means if there is a place where I can help I can get it from the investor update.
deleted 2y ago
[deleted]
jonbishop 2y ago
Aren't investor updates easier to send out when things are going well?
- jedberg 2y ago
  I think a lot of people are missing the point. When the company first gets funded, things are always going well. Companies that establish a cadence of monthly investor updates at that time tend to do better because they know that in one month they need to have something to put in the update, so they work towards that.

m1n7 2y ago

- 25% of investments make zero return (i.e. 100% write offs) - 25% produce a return greater than zero but less than 1x (i.e. are losses) - 25% produce a return between 1x-3x - 15% produce a return between 3x-10x - 10% produce a return of 10x or greater If you bucket the first two as "zeros" or near zeros, the third one as "something you wish you hadn't invested in" and the last two as good investments, you get to roughly the same 1/3, 1/3, 1/3 that I like to use. so breaking even is bad all of a sudden... and who needs a return greater than 0-1x when everyone's getting paid and you have a little on the side for emergencies?

drewcoo 2y ago
> you get to roughly the same 1/3, 1/3, 1/3 that I like to use But your numbers are 1/2, 1/4, 1/4. I think you're being a bit optimistic.
- fhdsgbbcaA 2y ago
  People worry about food being stuck in their teeth, saying the “wrong” thing by mistake, and a million other faux pas. If I confused 50% and 1/3rd in public I’d be mortified.
afavour 2y ago
Welcome to the world of VCs. And, honestly, business in general the last decade or so. It feels very much like building a sustainable business is frowned upon. Build big and build fast so that you can cash out at max value, or just crash and burn. It’s why your password manager can’t just be a password manager, it’s a subscription security product. Your cloud storage can’t just be storage, it has to be a more expensive document management system. So on and so forth.
- jschveibinz 2y ago
  It's not that building a sustainable business is frowned upon. But if you raise money from investors using a traditional note or equity purchase, then you have created the need for an exit. There are royalty-based options for raising money: you take money in return for an annual royalty payment for a fixed number of years plus repayment. It's similar to debt.

a1371 2y ago

One might look at this and think "huh 30% success is not too bad" missing the fact that this is from a VC perspective. From a founder perspective, this is abysmal because the chance of you getting funded by the likes of a16z or YC is already really slim, about 1% according to YC. So let me ask you something: would you embark on a journey if you knew your chance of success is 0.3%? So many good startups go to oblivion, pandering to the VCs. Where they could have been more resilient on their own.

beau_g 2y ago
There's more success metrics to take away from a startup than just sticking around and creating a 3x or greater monetary return from an initial arbitrary valuation. If you were funded, you were getting paid something, if you were attempting something VCs funded, you were most likely trying something on the cutting edge in which case you are sure to have learned something novel in the space you will most likely to continue to work in. Consider going to work for any other company, let's say a publicly traded one for simplicity - if you work there for 5 years, and the stock price stays flat adjusting for inflation, is whatever you did objectively non successful? Of course not, in this case you would judge your success based on what you shipped + your own career growth. I don't see why you should look at it any differently from a founder or early startup employee perspective in retrospect (though believing this before starting is probably not healthy as if you believe in the VC recipe you should really be abiding to success as a forcing function). For 100% bootstrapping to avoid "pandering to VCs", your success metric is narrower (you have to achieve monetary success in a rigid, often short, timeframe) and your risk threshold is lower thus the successes on the learning side/pushing tech forward are less likely.
condiment 2y ago
It’s disingenuous to claim that the success rate is .3%. The success rate for the first stage (pre-vc) of venture might be one percent, and the success rate for the next stage (post) is 10 to 25%, depending on how a founder perceives success. These rates are independent. You can’t aggregate them because the level of effort to secure VC funding is very different from the level of effort required to take a funded start up to unicorn heights. If I understand your argument to be that startups are relegating themselves to the trash bin because they’re attempting to get attention from venture capitalists at the expense of some fundamental “goodness”, some data supporting that point would be helpful. But that’s not what’s in the article.

stanleykm 2y ago

I havent been involved in startups in a number of years but at the time when i was the trend was to give a bunch of 20-somethings with an interesting product idea a few million dollars and let them have at it. I wondered then and I still wonder if early stage investors would see better returns if they provided a little more boots on the ground support through either getting an adult into the room or training or whatever.

Etheryte 2y ago
Well that's kinda the whole idea of Y Combinator, isn't it? Sometimes you really do need to be blind to all the pitfalls to take your lucky shot at it, but adding some prior experience into the mix can help you not shoot yourself in the foot along the way.

osigurdson 2y ago

I'm wondering if the investment size is normalized here? I.e. are these all ycombinator like $500K investments or is there wide range? If there is a considerable range, is there any correlation to investment size?

nitwit005 2y ago

Those numbers seem like fairly vague estimates, and they are only for companies they chose to invest in.

fhdsgbbcaA 2y ago

50% != 1/3.

mdale 2y ago

At first I thought this article was going to be a about life expectancy for startup workers vs other companies