Can You Predict Whether Your Startup Will Succeed?
Did you know that it is a myth that 80%-90% startups fail within the first 18 months? Yes, it has been affirmed and reaffirmed by industry experts, but there is no evidence to prove it. The myth began with a 2013 Forbes article which said that Bloomberg reported these statistics, but the link does not lead to a specific article.
In fact, there is no consistent data about startup failure and/or success. Statistics from different organizations vary considerably:
· A Harvard Business School study says that 3 out of every 4 venture-backed startups fail overall.
· The US Bureau for Labor Statistics says that 50 percent of all new companies last for 5 years and one-third of these companies last for 10 years.
· According to the Small Business Administration, 66 percent of new businesses last for 2 years.
The actual numbers show that around 2 out of 10 companies fail within the first year and more than half of these companies last until the fifth year.
CB Insights, a venture capital database, compiled a report on the top 20 reasons for the failure of startups. The revelations are, no doubt, startling.
Analyses like these helps identify factors which can predict the success or failure of startups.
First Round Capital
Venture capital firm First Round Capital conducted an analysis into the predictors of startup success using ten years of proprietary investing data. First Round does, however, add the cautionary note that “correlation isn’t causation: The fact that successful investments have something in common could be a sign of a causal relationship, or it could reflect the importance of some hidden variable.” Their findings are:
1. Female founders outperform their male peers. Companies with female founders were observed to perform 63% better than those with all-male teams. Also, it was observed that among First Round’s top 10 investments of all time based on value created for investors, three teams have at least one female founder. Therefore, women appear to be excellent technology founders and should be funded more often.
2. Younger founders performed better than older ones. Teams with an average founder age of under 25 (when First Round invested in them) were observed to perform almost 30% above the average investment. Interestingly, while the average age of First Round-backed founders is 34.5 years, the average founder age for the top 10 investments was 31.9 years. Thus, it appears that in the technology sector, age is a factor for success.
3. Founders who attended a “top school” are more likely to be successful. First Round-backed teams with at least one founder who attended Ivy League schools, MIT, Stanford, or Caltech were seen to perform 220% better than other teams. Although the stories about Bill Gates and Mark Zuckerberg dropping out of college to establish successful companies have achieved legendary status, it appears that where you went to school does matter.
4. Founders with experience at top companies are more likely to be successful. First Round discovered that teams with at least one founder who has previously worked at Google, Facebook, Apple, Amazon, Microsoft, or Twitter performed 160% better than other teams. Such teams were also likely to land pre-money valuations which were nearly 50% larger than other teams. Hence, the foundational skills learnt at these jobs in these hard-to-enter companies and the impact of embedded networks makes a difference to the success of a startup.
Portuguese Startups
A study on the factors that influenced the success of Portuguese startups found that the characteristics of founders and economic timing (or external factors) had a significant effect. Factors like young founders less than 25 years old and lower education levels — high school or less were found to be associated with failed startups. Also, in contrast to existing literature, the study found that startup success is negatively correlated with marketing expertise. The prediction model developed by the authors had an accuracy rate of 82% for Portuguese startups.
European Startups
Patent ownership was found to be predictive of future success in the biotechnology and software sectors in a study of European SMEs and startups. The study also observed that patent ownership increased the probability of success by a factor of 3.6 in all sectors.
Researchers at the Carnegie Mellon University have created an algorithm based on artificial intelligence to predict the success of M&As. They used publicly available data from TechCrunch and CrunchBase to develop a model that has a true positive rate between 60% and 79.8% and a false positive rate between 0% and 8.3%. The authors mention that despite having a large magnitude, articles on CrunchBase had many missing attributes, which made it difficult to develop the model with more accuracy.
Conclusion
Not every startup becomes a unicorn — a startup worth over US$ 1 billion — and not everyone has to become one to be successful. The success or failure of a startup isn’t all about luck or timing — some failures or successes can be predicted by analyzing patterns and trends. This 15-year-study into the world’s most successful entrepreneurs was able to pinpoint certain characteristics that set successful founders apart from the failures. Sometimes, according to this study, it may only be a matter of changing one’s attitude to set a startup on the path to success!
