Companies typically die around ~20 months after their last financing round and after having raised $1.3 million. Companies in the social industry saw the highest of number of startup failures in the period in question.

Want to identify acqui-hire targets? Get our list of dying tech companies.

Earlier, we’d described how the acqui-hire has become the exit du jour for startups struggling to stay afloat. While the acqui-hire does provide a nice alternative to death, it is a fairly recent phenomenon and is by no means a guarantee. For most tech companies whose intellectual property or talent is not compelling enough to catch the eye of the Googles, Facebooks, or Yahoos of the world, the cold hard reality is death. (See our compilation of 51 startup failure post-mortems)

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We wanted to take a look at CB Insights data on tech companies that died between 2010 and 2013 to see what we can learn about startup mortality.  A few notes first:

  1. Startup death is surprisingly hard to identify.  Many startups are essentially dead but limp along for years in zombie-like fashion. So although on life support, these walking dead startups are not included in this analysis since they’re not officially deceased.  Shikhar Ghosh, a senior lecturer at Harvard, who’d studied startup mortality found that “VCs bury their dead very quietly” further compounding the issue of identifying dead companies.
  2. Survivorship bias reigns.  We tend to fawn over the few billion dollar exits and hear little of the failures. As a result, there is less data out there about startup death. Ultimately, this is bad for the ecosystem as Jason Cohen explains in his essay on the topic of survivorship bias, “The fact that you are only learning from success is a deeper problem than you imagine”, but this is a topic for another day.
But despite those challenges, we are increasingly tracking startup mortality data. In our efforts to algorithmically rate private companies, it’s critical to understand both the successes and failures to train our models.
Without further delay….

In each year since 2010, 70% of all dead tech companies have been in the internet sector. This is hardly a surprise as within tech, a majority of funding and deals has gone to the internet sector and so it would follow that the sector would have the largest proportion of dead companies.  The % of companies dying within the internet sector has stayed relatively range bound over the last several years as well.

Mobile has seen far more volatility in terms of its share of dead companies.  Mobile talent being highly coveted has made these firms a prime target for acqui-hires but as investors pour billions into mobile-first companies, it is likely the # of failed mobile startups will also climb.


Most Dead Companies Died Before Raising >$1M

 

55% of failed startups raised $1M or less, and almost 70% companies died having raised less than $5M overall.  Not a big surprise. Companies at the earliest stages are the most vulnerable due to limited financial runway, immature products and businesses and general uncertainty about whether the market needs what they’ve built.  This is why we’ll see more startup orphans.

While the dead companies on our list raised $11.3M on average, the median funding raised which is a better measure in this case was $1.3M.

20 months: The Average Time Between a Company’s Last Funding Round and Death

 

71% of the dead companies lasted less than two years after their last funding round. While some companies can take up to five years after their last funding round to be officially declared dead, the average company dies ~20 months from its last funding round in the absence of additional funding or acquirers. The median time is 16.5 months, or a little under a year and a half. In comparison, getting acquihired on average takes 2-4 fewer months, so if you haven’t seen either more capital or an interested acquirer by the 15-month mark, things are not looking good.  The line between death and an acqui-hire especially is quite thin.

Death is not specific to a particular type of sector or industry. In fact, the companies on our dataset represent a fairly diverse set of subindustries. To help you identify what’s not hot, the subindustries with the most dead companies, both over the past four years and in 2013, are shown below.

  • SpaceCadet

    As an angel investor, my biggest frustration is companies that are walking zombies. They do not know they are dead and cling on long after they should have called it quits and tried to salvage some shareholder equity. Some had good IP and should have looked for a orderly merger with a company who may give shareholders some hope.

  • ObjectMethodology.com

    I’ve started a discussion group called Startup100M for entrepreneurs that want to find the proper processes and procedures to help them go from startup to $100M as fast as possible. It seems that type of focus is currently needed to help keep companies growing instead of facing a zombie existence.

  • Dragana at ANAGARD, LLC

    I am glad that you are compiling failure statistics because people have to level set their expectations in the environment where running a startup is being glorified. Building a company is a hard work and most people fail. Sharing the stories of failure is the best method to teach entrepreneurship. In fact, management incompetence is the leading cause for a business failure, followed by lack of financial support. Further, startups that have received significant mentorship and outside advising increase significantly their survival rate. It’s all about lessons learned.

  • gcaus

    where is the “startup100M” discussion group?

  • acjohnson55

    The funny thing is that your perception conflicts with the constant “never admit defeat” advice founders are bombarded with.

  • Ender Oztas

    Good stuff. It would be good to know the industrial distribution of the initial data set as well so that we would have an idea of the death rate in each sector. If internet companies make 50% of the base data, than 70% death rate is a bad sign for Internet sector, but if 90% of the base is Internet then than it is a different story.
    Any ideas about the sector distribution of the tech companies that got funding?

  • OscarSVQ

    I´m spanish and the first cause of startup´s dead is a mix between low investment and angel investor´s requirements. They want startup making ton of money and maybe, after research the income statement, the invest in your Startup. At USA is different, they look for first users´tracking and after business model.

    Here is too hard to begin a Startup if you dont have succesess firstly.

  • RINGMASTR

    They’re like prisoners waiting to get shot in the firing squad :)

    Great advice –> “Some had good IP and should have looked for a orderly merger with a company who may give shareholders some hope.”

  • http://www.verminopolis.com Pigeon Industrialist

    I wonder how much capitalization this tech company got to monitor other tech companies. A bit incestuous, but a bold play. Nonetheless…good luck, it seems your market needs you.

  • nagleonce

    I’ve been well aware of this for years. I did “Downside.com”, which tracked which companies failed in the first dot-com boom. Failure was defined as investors losing 90% of their equity.

    “Zombie mode” is historically the most common result for VC-funded startups. About 10% succeed, about 20-30% go out of business, and the rest generate enough revenue to pay their operating expenses. Zombie companies typically downsize until costs match revenue, and continue to plug on. Looking back at our list from fifteen years ago, a few zombies live on. One example: Internet America, an early ISP (“Dialup access only $19.95 a month!) has been reduced to providing wireless internet services in parts of rural Texas, but is still operating. That’s what a zombie looks like.

  • Kipkemoi Kiptum

    First of all you called Mt. Gox in 2011! Maximum respect!

    Is it not possible for Zombie to come back from the brink?