startupfund_venture_fund.jpg

failure is success in progress

THE HIGH INCIDENCE OF FAILURE

Everybody wants to succeed with their business opportunity. In fact, the etymology of the word “opportunity” means a favorable circumstance or occasion and is derived from the situation of coming toward a port. It literally means “your ship is about to come in.”

Yet, the vast majority of business opportunities fail. I’ve certainly had my share of failures, which compelled me to spend time studying the issue.

According to Harvard Business School research, 70 - 80% of startups fail to deliver a return on investment to investors and a whopping 90 - 95% fall short of meeting projections. Many experts agree that between 50% and 90% of startups shut down completely within the first few years. (1)

Shikhar Ghosh of Harvard Business School explains the problem like this:

...FAILURE IS THE NORM.

Start-ups often fail because founders and investors neglect to look before they leap, surging forward with plans without taking the time to realize that the base assumption of the business plan is wrong. They believe they can predict the future, rather than try to create a future with their customers. Entrepreneurs tend to be single- minded with their strategies—wanting the venture to be all about the technology or all about the sales, without taking time to form a balanced plan…failure is the norm.

Startups aren’t alone though. According to research by professor Sydney Finkelstein of Dartmouth’s Tuck School of Business, 75% of all acquisitions also fail to meet expectations. (2)

Dr. Finkelstein described the problem like this:

I compared the value of the companies on their own and when integrated post-merger and in about 75% of the cases, the integrated whole was worth less than the two companies were prior to the acquisition or merger. That’s why it’s common to hear about an acquiring company spinning back off an acquisition only a few years afterwards as they “sharpen their focus” and get back to their “core strategy.

HOME AND PERSONAL CARE: ONLY 1 IN 21 SUCCED, A 95% FAILURE RATE

APPAREL: ONLY 1 IN 9 SUCCEED, A 89% FAILURE RATE

FOOD, BEVERAGE AND ALCOHOL: ONLY 1 IN 13 SUCCEED, A 92% FAILURE RATE

And the same level of failure data holds true for new product introductions. The Harvard Business Review article titled "The Consumer Goods Innovation Funnel," summarized a 2008 study of 100 consumer goods companies. The study showed that out of 553 new-product ideas generated in a year, only 74 went into development, and just 38 were actually launched. The ratio of ideas to launch is highest in the home and personal care category, but all the failure rates are high.

In addition to high failure rates among startups, investments, acquisitions, and new product launches, if a business does successfully get off of the ground, the likelihood of reaching meaningful size and revenue are even slimmer. In a survey conducted by the Association for Corporate Growth and that is mentioned frequently in Fortune magazine, only 5% of companies ever reach $1 million in revenue and only 0.625% make it to $10 million in revenue.  That’s only 1 out of every 160 companies that successfully get launched make it to the lower middle market in terms of size. (3) Given all of the above, it’s safe to say that most business opportunities of any nature fail.

1 http://hbswk.hbs.edu/item/6591.html

2  http://dl.acm.org/citation.cfm?id=769600 

3 http://fortune.com/2013/12/26/how-to-bust-through-barriers-to-business-growth/