Interesting article in TechCrunch http://tcrn.ch/cYXT6l about Ron Conway, the famous Silicon Valley angel investor’s discussion on the success rate of investor backed companies.
Some of the stats he used (apply to his own fund SV Angel):
– He expected about one-third of companies fail, one-third get investors their money back, and one-third bring a 2x to Google-x return,
– Actual numbers showed failure rate in recent years — since 2002 — was about 40 percent,
– This leaves 60% of investments that bring either a break even or nice return to the VCs. Of this number only 20-30% would return a 2x or more return, meaning 70-80% are basically losers.
Some good points in the comments:
– 90% of founders of venture backed companies end up getting “nothing”.
– Founder success is the true measure of a success — not whether an Angel can recoup losses.
– 90% of founders get $0-$200K from of their options (which given their lower salaries during the startup’s life is effectively negative).
– Most of the money from an M&A/IPO goes to the VC’s. The liquidation preferences take most of the value. Sometimes you’ll see the management get some type of carveout, but there’s rarely anything for the original founders (if they’re no longer in the company) or regular employees.
I believe the value of founders in the equation is lower than it could be. 2nd time founders usually have a much higher ratio of success (2/3) – partly because many of the first time losers never start another company.
So short of starting a company, having it funded and exit with a 2X plus return what are founders to do?
Educate ourselves – learn as much as possible before getting funding and fully understand and question the term sheet details; maximize your chances of success by taking a few important correct steps upfront.