Entrepreneurship is Not that Easy: 3 Out of 4 Startups Fail

Jay Thadeshwar By
December 24, 2012 0

From the outside it all looks very easy. An entrepreneur with a fashion technology and venture capital funds becomes millionaire at age 20. But now there is evidence that these start-ups backed by venture capital fail at a much higher than the industry usually mentioned.

Nearly three quarters of companies backed by venture capital in the United States do not return capital to investors, according to a recent study by Shikhar Ghosh, professor at the School of Business at Harvard University.

Compare that to the figures released venture capitalists. The common rule is that only completely fail three or four out of 10 new businesses. Another three or four initial investment back, and one or two produce substantial gains. The National Association of U.S. Venture Capital estimated that between 25% and 30% of companies backed by these investors fail.

Ghosh points out that the discrepancy is due in part to a lack of thorough investigation into the failures. Their findings are based on data from more than 2,000 companies that received venture capital funding, generally at least $ 1 million, between 2004 and 2010. He also studied the portfolios of venture capital firms and spoke with people from start-ups, says. The results were similar when examined data from the companies financed between 2000 and 2010, he adds. Venture capitalists “bury their dead in a very quiet,” says Ghosh. ”They emphasize the successes, but by no means talk about their failures.”

There are different definitions of failure. If it means the liquidation of all assets in which investors lose all their money, it is estimated that fails between 30% and 40% of U.S. start-ups with high potential. If the failure, however, is defined as not obtain the projected return on investment for example, a growth rate of the specific income or a date to be recovered money-then fails over 95% of new companies, according to research by Ghosh.

Failure is often harder for entrepreneurs who lose money they have borrowed credit card or your friends and family that they raised for venture capital.

“When one has achieved self-sufficiency of a business that is not removed and salary savings is depleted, is one of the hardest things to do,” says Toby Stuart, a professor at the Haas School of Business, the University of California at Berkeley.

Venture capitalists made high risk investments and it is within their calculations that some fail, while raising funding entrepreneurs often earn wages, says.

Daniel Dreymann, founder of Goodmail Systems Inc., a service to minimize spam, moved his family from Israel to U.S. in 2004, a year after co-founding the company in Mountain View, California.The company raised $ 45 million in venture capital from firms like DCM, Emergence Capital Partners and Bessemer Venture Partners, and forged partnerships with AOL Inc., Comcast Corp. and Verizon Communications Inc. At its peak, in 2010, had Goodmail about 40 employees.

However, the company ran into difficulties after his relationship with Yahoo Inc. fell apart earlier this year, has Dreymann. A Yahoo spokeswoman declined to comment.

In early 2011 fell an acquisition by a company which is part of the Fortune 500. Soon after, Dreymann Goodmail handed the keys to a business liquidator.

All Goodmail investors incurred “substantial losses” says Dreymann. He helped the liquidator to return everything he could to investors of Goodmail says. “These people believed in me and supported me.”

The way he has handled his company the entrepreneur who fails, and how well it has worked with its previous investors, makes a difference in the ability to persuade venture capitalists to support future U.S. start-ups, says Charles Holloway, Director of the Center for Entrepreneurship at the University of Stanford.

In general, companies unsupported fail more often than those funded by venture capitalists in the first four years of existence, usually because they have the money to stay afloat if the business model does not work, says Ghosh. The companies supported by venture capital tend to break after his fourth year, once investors stop injecting more funds, explains.

Of all the companies, about 60% of start-ups survive until the third year and about 35% to 10 years, according to separate studies by the Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit organization that promotes entrepreneurship in the country. Both studies were considered only corporations with employees. In addition, companies that did not survive may have closed its doors for reasons other than a failure, for example if they are acquired or the founders are dedicated to new projects. Weakened companies were counted as survivors.

Of the 6,613 U.S. companies initially funded with venture capital between 2006 and 2011, 84% remain without public, and operate independently, 11% were acquired or made an IPO, and 4% failed, according to Dow Jones VentureSource. Less than 1% is currently registered to go public.

Jay Thadeshwar

Jay blogs about social media, web, online marketing and technology. He is a management student and digital enthusiast. Web fascinates him and his passion for social media resulted into this blog called TechTheBest.com. Check out - My Google Profile+, and Jay's short bio.

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