I have good friends who may want to dispute the title of this blog because it certainly pops the bubble that is the accelerator craze that I’ve talked about before (see “Accelerators – do the math”), not to mention the research-based view that having VC money signals to others that your venture is likely destined for success. But in this case, my title is backed up by recent research coming out of Harvard Business School. Shikhar Ghosh, a senior lecturer, claims that three-quarters of U.S. venture-backed firms don’t return their investors’ capital.
Ghosh’s research seems to fly in the face of the National Venture Capital Association, which estimates that only 25-30% of VC-backed ventures fail. Mr. Ghosh, who bases his findings on studying more than 2,000 companies that received VC funding from 2004-2010, believes that we don’t do enough research on failures. There are failures and there are failures. In other words, some failures are complete disasters for everyone involved, for example, the recent collapse of OnLive. In that case, everyone involved lost their equity and any remaining assets were sold to pay creditors. Others are just the result of a founding team that didn’t know when to stop pivoting and realize that there was no viable business model for their venture.
Still, it’s important to understand that VC-backed companies fail less often than non-VC-backed companies, according to Ghosh. Over the long term, the nonventure-backed companies have a higher likelihood of failure because, generally, they don’t have enough money to grow.
My VC friends tell me that a failure in an entrepreneur’s history doesn’t scare them if the entrepreneur has also had successes. In fact, I suspect that VCs are a bit superstitious because if you’ve never failed, they’re worried that your first failure might come on their watch. Dow Jones VentureSource reports that only 4% of companies funded by venture capital between 2006 and 2011 went out of business by ceasing operations while about 84% continue to operate as closely held businesses.
So does venture money insure success at start-up? Absolutely not, but it can make the difference in whether the company survives and grows over the long term.