The Venture Capital Secret: 75% of start-ups fail by Deborah Gage

TL;DR - VC’s don’t talk a lot about their failures, so the rate in which their backed firms succeed has muffled numbers. In reality, 75% of venture-backed firms don’t return the investor’s capital. A notable example is Daniel Dreymann, a founder of Goodmail Systems, who raised 45 million dollars in VC funds, but ultimately failed as a company.

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Tags - Start-up fundraising, VC Pro and Cons, VC Framework

Questions answered:

  • What percentage of startups fail?
  • Whats a notable example of a failed VC backed startup?

Summary:

  • About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital
  • Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.
  • VC’s don’t really talk about their failures
  • Failure Example: Daniel Dreymann, a founder of Goodmail Systems Inc., a service for minimizing spam.The company raised $45 million in venture capital from firms. In early 2011 an acquisition by a Fortune 500 company fell apart. Soon after, Mr. Dreymann turned over his Goodmail keys to a corporate liquidator.
  • Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics
  • Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011, 84% now are closely held and operating independently, 11% were acquired or made initial public offerings of stock and 4% went out of business, according to Dow Jones VentureSource. Less than 1% are currently in IPO registration.

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