Investing is a balance of risk and reward; depending on whose statistics you read, at least 90% of start-ups fail.
Of course, a small number succeed in becoming huge successful corporations and making investors a lot of money. These are, however, rare but of course hit the headlines. We don’t hear about the failures.
One survey I have found is more optimistic saying 37% of software or IT new-starts survive 4 years (see www.statisticbrain.com). Others point out that the number who survive and actually make it to ‘reasonable levels of income to grow’ is less than 1%.
Shikhar Ghosh’s research at the Harvard Business School shows venture-backed startups are failing at a higher rate than most VC’s admit. His results, based on a survey of 2,000 such businesses in receipt of at least $1m in investment capital, show 30-40% of them fail to return their investment.
The number failing before they get anywhere near attracting such significant capital is far higher. So at the real start-up end the failure rate is certainly greater.
In its survey last year, the ‘Start-up Genome Project’ showed that out of a sample of 3,200 startups, 74% try to scale and grow too quickly. Of these 93% fail to reach a turnover of $100,000 a year.
This isn’t a problem unless you don’t read the statistics and take a real view of the risks when considering your own start-up or investing in others. Too many wide-eyed prospective entrepreneurs only really see the successes in the press stories.
Maybe you think this is all obvious? However it’s sometimes ignored in the way some Crowdfunding platforms publicise themselves. I’m not against these platforms, indeed I welcome what is fast becoming a new asset class or route to investment, but I do worry about the fallacy that all will succeed.
There is of course nothing new in hiding failures in business, or rather trumpeting only the successes. Brokers and professional fund managers that seek your investments do it all the time. The key difference is that they do mention, clearly up front that you might lose your investment. Indeed, since they are all highly regulated, they would break the law if they failed to do so. As Crowdfunding is relatively new, the regulators are still playing catch-up on the public funding of the start-up.
What can we do about this? Well I said I was in favour of Crowdfunding (provided the risks are fully explained) and see no reason why the mass public should not be able to benefit from the success of the best start-ups, as it is true that up until now, it has been left to professional investors or rich people (business angels) to make the gains from the few. These traditional investors understand that there is a great number of failures and spread their investment accordingly.
The message is then if you want to invest with the crowd, do so, just remember the investment is as likely to succeed as a bet on the many internet casino sites. So if you do want to take a risk make sure you can afford to lose.
If you are an entrepreneur seeking investment, you may want more than just the cash, so seek the traditional business angel or venture investor. By all means consider and use Crowdfunding. Just don’t be disappointed if you fail – but you might of course be one of the 10% or so that succeed!