Sunday, July 21, 2013

The Real Odds of VC-backed Success

I try to give entrepreneurs a realistic view of their chances of startup success.  Yet I've always relied on anecdote and example, rather than hard numbers.  Now I don't have to.  Here is a set of definitive numbers from across the entire industry:
http://nyti.ms/156D8RL
"According to the data provided by Sand Hill, since 2003 only 6 percent of venture capital exits have been through an initial public offering. (1% go public via reverse merger)

41 percent of venture capital companies fail and are worthless.

For the 52 percent acquired, or roughly 3,500 companies, Sand Hill reports that only about half sell for an amount that is above the total amount they raise.

7.5 percent of the venture capital I.P.O.’s had exit values that were below the total venture capital investment. As for sales, the venture capital investors still need to be paid back their 8 percent accrued dividend. This probably puts the number of deals where the founder receives anything in the 20 percentile range.

Adjusted for risk, the payoff for an entrepreneur taking venture capital money was really no better, on average, than taking a salaried job for a person of similar background.

VC’s attraction is the 2.3% of deals where the payout is > $100 million and the 0.18% of deals where it is > $1 billion."
The good thing is that the classic 10% rule of thumb appears to apply--if 20% of entrepreneurs who take venture capital earn some return from their startup, 10% achieving significant success seems reasonable.

It also supports one of my sad conclusions, which is that if you want to make money, entrepreneurship isn't the best option.  On a risk-adjusted, the financial rewards of entrepreneurship are average at best.

Nonetheless, I'm reminded of the great line from "Dumb and Dumber."  After being told by his dream girl that the odds of her falling for him are one in a million, his eyes flash and he says, "So you're telling me there's a chance!"

No comments: