The venture capital funnel highlights the natural selection inherent in the venture capital process. 70% of companies are orphaned or die along the way.

Anecdotally, it’s known that most startups fail. But looking at the data, we can see the hard truth in the numbers and better understand where in the funding lifecycle startups begin to lose traction.

We followed a cohort of over 1,000 startups from the moment they raised their first seed investment to see what happens to them empirically.

So, once you take your first bit of seed funding, what can startup founders expect? The data bears out the conventional wisdom: Just over 70% of startups stall at some point in the VC process and fail to exit or raise follow-on funding.

The Top 20 Reasons Startups Fail
We analyzed 100+ startup failure post-mortems and identified the top 20 reasons startups fail.

Of the 1,098 tech companies we tracked that raised seed rounds in the US in 2008-2010, less than half, or 46%, managed to raise a second round of funding. Every round sees fewer companies advance toward new infusions of capital and (hopefully) larger outcomes. Only 14% of our companies went on to raise a fourth round of funding, which typically corresponds to a Series C round.

The data below gives a more detailed look at the outcomes.

But first some notes:

  • This analysis contains a cohort of tech companies headquartered in the US that raised their first round of seed funding either in 2008, 2009, or 2010 and follows them through to February 28, 2017. Given the date range, these companies have had a substantial amount of time to obtain follow-on funding and exit.
  • Tranches are not counted as follow-on rounds, only equity rounds are counted as follow ons.
  • Of note, seed deals were on the whole less prominent in 2008-2010 than they are now. They’ve risen in popularity in the last few years with the explosion of micro VCs and the greater frequency of seed deals by multi-stage funds. If we were to repeat this analysis a few years from now, the numbers could look very different and there would likely even be a smaller proportion of companies obtaining Series A and Series B funding.

What we found:

  • Close to half (46%) of companies that raised their initial seed in 2008–2010 ended up raising a second round of funding.
  • 306 (28%) of companies that raised a seed round in 2008–2010 exited through an M&A or IPO within 6 rounds of funding.
  • Less than 1%, 10 (0.91%) companies from our seed cohort ended up becoming unicorns valued at $1B+. Some of these companies are the most-hyped tech companies of the decade, including Uber, Airbnb, and Slack.
  • 70% of companies end up either dead, or become self-sustaining (maybe great for the company but not so great for investors). It is hard to know the exact breakdown for these companies as funding announcements get a significant amount of fanfare but cash flow positivity or profitability does not. Also, some companies stumble on as zombie companies for years before calling it quits. Not to mention, the death of companies generally happens without any official announcement, i.e. there is no such thing as a “startup death certificate” (although increasingly, startups are willing to share their failure post-mortems).

funnel1

Some other metrics:

  • The median seed disclosed deal size was $400K while the average was $700K, and the gap between median and average round sizes increases over time, showing that mega-rounds in later stages skew the average upward. By the fifth follow-on round, the median round amount was $40M but the average was $175M.
  • 61% of companies that raise a follow-on after their initial seed are then able to raise a second follow-on round after that. In other words it is easier for companies to raise a second post-seed financing than a first post-seed financing—it is easier for companies to raise a Series B than a Series A.

  • 10 companies exited for over $500M from this cohort, with only 5 exiting for over $1B+, indicating the rarity of such high exit valuations. The $1B+ exits among our cohort include Nutanix, Covermymeds, Twilio, Trade Desk, and Instagram.

funneltable

 12/9/2015 Analysis

Below you can take a look at our previous analysis, which looked at companies that raised seed rounds in 2009 and 2010 and follows them through 11/19/2015.

But first some notes:

  • This report analyzes a cohort of tech companies that raised seed funding in 2009 and 2010, and follows them all the way through 11/19/2015. This is a sufficiently mature vintage for us to conduct this analysis on, i.e. these companies have had enough time to succeed, or fail.
  • Of note, Seed deals were on the whole less prominent in 2009-2010 than they are now. They’ve risen in popularity in the last few years with the explosion of micro VCs and the greater frequency of Seed deals by multi-stage funds. If we were to repeat this analysis a few years from now, the numbers could look very different.

Some of our findings:

  • Less than half (40%) of companies that raised a Seed or Seed VC round in 2009-2010 raised a second round of funding.
  • 225 (22%) of companies that raised a Seed in 2009-2010 exited through M&A or IPO within 6 rounds of funding (1 exited after the 6th round of funding, for a total of 226 companies)
  • 9 companies (0.9%) that raised a Seed round in 2009-2010 reached a value of $1B+ (either via exit or funding round) including Instagram, Uber, and Slack.
  • 77% of companies are either dead, the walking dead (bad outcomes), or became self-sustaining (a potentially good outcome for the company but probably not good for their investors). It is hard to know the exact breakdown for these companies as funding announcements get a significant amount of fanfare but cash flow positivity or profitability do not. Also, death of companies generally happens quietly in the middle of the night (although increasingly, startups are willing to share their failure post-mortems).

VC funnel

Looking at the breakdown by round, there are some more interesting findings:

  • The median Seed size disclosed was $500K for companies that raised their Seed in 2009-2010
  • 56% of companies that raise a follow-on round after their Seed are then able to raise a second follow-on round after that. In other words, it’s easier to raise a second post-Seed financing than the first post-Seed financing (as noted, only 40% of companies are able to raise a post-Seed round). However, as companies move into the middle and late stages, the proportion of companies that manage to raise follow-on capital decreases. For the 3rd follow-on round after Seed the percentage drops to 39%, and then to 38% for the 4th and so on.
  • In the later follow-on rounds, the gap between the average amount raised and median amount raised becomes much higher, indicating the presence of mega-roundsVC funnel stats

For entrepreneurs who’ve raised multiple rounds of financing or venture capital investors making the decision to invest in companies, how does the funnel above parallel your experiences? Look forward to your comments below.

All the underlying data for this venture capital funnel analysis comes from CB Insights venture capital database. Sign up below.

  • Steve_2014

    Why are acquisitions considered a loss according to this funnel? Acquisition is the goal for the vast majority of companies – most don’t WANT to be the next Facebook. Of course it is interesting research to challenge the accepted social narrative that it is most desirable to be the next unicorn (sure, the money is nice, but cashing out from a M&A isn’t bad either). It would be an interesting next step to see where the cash amounts fall in this funnel – therein defining winners not by the ability to attract multiple rounds of funds but to drive valuation of the company and exit with cash in hand. And the most interesting piece of research would be to see where the serial entrepreneurs emerge in this pipeline – and how much value they create over say 10 years.
    -steve

  • http://www.4044walnut.com Anand Sanwal

    Great point. But when raising VC, they are looking for the next Facebook (most of them at least). So from a VC perspective, the unicorns are what they’re interested in.

    But great point that many of the M&A that might have happened could be great outcomes for the teams behind these companies.

  • http://www.turnleaf.be Paul Van Cotthem

    It would be interesting to add an additional layer to the front-end of the funnel, namely “What percentage of all start-up companies make it to the stage where they get any VC-funding at all?”

    Does CB Insights have any figures about this?

  • ANAGARD, LLC

    I would encourage you to dig deeper into data to segment “self-sustaining” companies that do not seek or require VC funding. I would be very interested in seeing such analysis and would be willing to help you with such project.

    I am based in North Carolina and most startups and new businesses in South East region have to bootstrap their business and they grow slowly without getting external funding (excluding biotech segment) because of lack of venture capital funds in the region. That doesn’t mean that we don’t have a vibrant entrepreneurial community; yes, we do, with top engineering universities in Triangle, we have plenty of research that is just waiting to be commercialized. Because of that, it would be nice to see statistics related to companies that bootstrap their business and to encourage organic growth because venture funding is scarcely available outside Silicon Valley.

  • http://blog.gypsii.com Shane Lennon

    Have heard a number thrown around by a few VC teams/presenters of 90% of startups who aim for an A round never get it, i.e. only 10% get an A round. Never got an actual hard datapoint, nor a benchmark for how many companies, nor a clear definition of this wider group of startups and the time period it is measured over.

  • Raivo Laanemets

    I’m also interested in the stats of startups that manage growth with re-invested profits only (the initial development is done through bootstrapping with founder’s money) – are there any at all?. I’m working as a freelancer and most of my clients aim for this. During the last 5 years, all of such projects have failed at the point where money has ran out. Telling it to new clients has no effect, everyone replies “this project is going to be different”. And then it fails again.

  • Matthew S LaCrosse

    It would also be interesting to see the industry percentages of these companies.

  • Ricardo

    I think the point is that if you already got seed capital from VCs, you lost. You have to be in a spiral of growth where you can only repay your investor with an IPO. I don’t think any professional VC wants a private company that gives back some dividends.

  • Guillaume Meulle

    Very interesting to have some data on large scale ! I’m surprised the failure rate (Dead/self sustaining divided by the precedent cohort) is not decreasing and even is increasing after 3rd round (from 29% to 65%, even more than the failure rate after seed of 48%). Late stage investment is may be as risky as seed investment after all !

  • http://verios.com.br/ Felipe Sotto-Maior | Vérios

    Those cases are represented in the funnels, aren’t they? They’d be the “Self-Sustaining” companies, represented by the zombie figure.

  • Tim_Dick

    Exellent thanks – consistent with our experience. To address a few of the comments as a VC. 1. Most VCs (except mezzanine / late stage) don’t invest with the main goal to be an IPO – the odds are too long. There are 7X more M&As than IPOs with an average exit price of $140M. 2. There is little tracking of individual angel / accelerator stage companies, but as a long-time accelerator mentor, most never get VC. If I had to guess I’d say 1/8. Why? The reason is almost always team. 3. Why are the odds so long? The premise of every startup is to go out and beat every incumbent in the world or invent a new market. Think about that for a moment. That is pretty F’ing brave so my hat is always off to entrepreneurs. Before I was a VC, I’ve done five startups as CEO (1 IPO, 2 good M&As, 2 fails) – it is the hardest thing in the world.

  • http://www.seeingbothsides.com bussgang

    This is a great analysis, Anand. Thanks for sharing it as you’re doing entrepreneurs a great service by helping them understand the long odds to building a billion dollar company. If it were easy, everyone would be doing it!
    One aspect of this analysis that is worth highlighting is that these are the companies that attract institutional, serious seed money. There are (my rough estimate based on doing this for 25 years) 100:1 companies that don’t even achieve this milestone. Thus, the odds are actually 100x worse than you show if you’re just at the stage of thinking of starting a company. I tell entrepreneurs that if they were to do the probabilistic-weighted expected value analysis of starting a company, they would never do it. It’s empirically irrational! Thus, you better be really, really convinced your idea (and your team) is special enough to beat the odds before you embark on the journey. One of my recent, entrepreneurial HBS students came back after raising VC capital and being in the midst of building her venture and said, “Jeff – I’m kind of mad at you. You told me starting a company would be really, really hard. You lied to me. It’s harder.”

  • george clark

    Interesting article but Anand Sanwal may be off on his economics. The bigger name VCs with big AUM have 2-2.5x target, not 4x, and the portfolio is more complex depending on the vintage and where in investment cycle ect… EVERY VC would love the 16x, most aim at 2x floor 4x upside. The naked expected return is useless data, really the amount invested and the timing/stage of the particular fund is most pertinent. Actually the most important part of VC is the illiquidity, therefore the timing/horizon of every portfolio co vs the time remaining in investment period is more important a factor than the number of x’s targeted on investments…