Looking for Context

Now firmly in the middle of our third year of operations, Gain Compliance has been fortunate to hit several operational milestones. Subjectively, the outlook is very promising: growing team, expanding customer base, high functioning product development team, etc.

Taking a step back from Gain’s individual situation, it’s interesting to look its trajectory in the context of other early-stage companies.

How does Gain’s to-date success compare to others’?

And, what are the industry odds of continued success?

Here is what the objective picture looks like.

It’s Hard out Here for a Startup

Almost two years ago, in another blog post I laid out the pretty dire statistics for startups referencing CB Insights data .

Source: CB Insights

The punchline of the above graphic: of approximately one thousand startups followed who had raised a seed round, approximately two-thirds would ultimately fail.

Different Data, Same Answer

The CB Insights failure rate is corroborated elsewhere: in a study presented at the 2013 Fair Value Summit based on workforce statistics, the 4-year failure rate was recorded at 56% and the 7-year failure rate was determined to be 69% based on a dataset of 8.9 million U.S. businesses.  Similarly, an examination of Bureau of Labor Statistics data showed 5- and 10- year failure rates of 51% and 66%, respectively.

Plotting this data graphically looks like this:

Source: Arcstone Partners

The shape is not pretty – a steeply sloping line in the near term which is most certainly not “up and to the right.”

The Prospect of Stability

Notably, the data shows only marginally improving prospects across a company’s first years of operation. CB Insights plots the odds as follows:

For the small minority of startups which succeed in raising a first (seed) round of financing, 67% will ultimately fail.

Raise a second round? Your likelihood of failing plummets to….60%.  

Raise a third round? Your likelihood of failing falls further to… no, wait, it stays the same… 60%.

The exceptionally high rate of failure of startups during their infant mortality stage is well known. What is not universally recognized is how long infancy lasts.

It turns out that most companies which make it a year and scrape together a round of financing will make it another year (or two or three). And that many companies can scrape together additional rounds of financing after pulling together a seed round. And that both of these things can happen, and do in a majority of cases, when the company still does not succeed.

When is a company generally out of the woods?

As the authors of the second survivability study referenced above study put it:

“survive the first five years and you’re bankable.”

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