Researchers Stern and Guzman found that high-growth firms are being formed as actively as ever, yet the success of these companies is not great. The U.S. Bureau of Labor Statistics states that 20% of startups fall apart after one year and 50% of startups close their doors within five. According to Stern and Guzman, “Even as the number of new ideas and potential for innovation is increasing, there seems to be a reduction in the ability of companies to scale in a meaningful and systematic way.”
Startup Volume Over Time
In 2013, there were 39 unicorns, successful startups that reached a valuation of more than $1 billion, whereas currently there are 630 private active unicorns that are valued at just under $2 trillion. Seed deals are falling because there are fewer fundable companies and larger funds often focus on more mature deals.
Companies are funding fewer early-stage startups and funding higher investment dollars into mature companies. Startups are raising larger rounds and staying private longer. This means that they are experiencing larger eventual exits due to investors and capital recycling effects. In 2010, global venture capital exit proceeds were $70 billion, a number that grew to $300 billion by 2018.
Likewise, technology companies are now reaching the average age of 11 years before going public, compared to an average of about five years in 2011. More growth and value upside remain inside private markets as startups are aiming to build high-quality firms.
Improving the Success Metrics on High-Quality Startups
Bob Myers Founder and Chairman of SKY LLC, a company bringing startup, entrepreneur and intrapreneur ideas to market, works to help companies construct a plan that makes money while maintaining equitable ownership stakes and strong financial measures. “Our standard is only highly profitable and highly scalable—the big, bold ventures that will make an even more significant impact,” he states.
When considering quality startups, it is important to exclude small Ma and Pop businesses and focus on the startups that have a high potential for growth. Unsurprisingly, successful, high-growth startups have similar characteristics that contribute to their growth profile. Reaching 1,000 or more employees is typically an indicator of a high-growth, high-quality startup that will continue to succeed.
According to Stern and Guzman’s research, factors that contribute to this success include registering for a patent, not naming the company after a founder and location. Firms based in Delaware, which has business-friendly incorporation policies, were 131 times more likely to have 1,000 employees, and receiving a patent was attributed to about 47 more times likely to grow to 1,000 employees. Startups that are named after a person, for example, Jo’s Pizza, are 78% percent less likely to grow.
How to Succeed
CBInsights reports that 42% of new businesses fail because there is no market need. Do your research to get an understanding of the market for your business and how to fit your product or service to meet the needs of the consumer. It’s most important to get the product or service into the market rapidly and garner feedback.The new model is to sell first and then build. For example, every Tesla is sold before it is built, this is known as just-in-time manufacturing.
Myers added, “Research and use Agile and Lean design methods when building your company and contrast their benefits to the Waterfall method.Build a very small portion of the solution with reasonable complexity. Then, you can use this as a small measurement for any improvements needed. Next, you will be able to build a small piece of the solution with high complexity. This allows you to establish some baselines, receive fast feedback, and pivot rapidly as you learn by doing.”
While experience definitely does not always lead to success, research from Stanford University found that “the number of prior firms going public [per founder] increases the next firm’s revenue by an average of 115% each.”
For companies looking to take the fast track to success, prestige plays an important role. From renowned investors to accelerators, a startup with a positive earned reputation has the potential to raise the best funds from the best investors and access more mature deals. For example, Y Combinator accelerator startups are three times more likely to become unicorns.
Companies like SKY LLC provide far-reaching ecosystems of partners that will enhance and shape the vision of a startup’s concept, pushing it past its present potential. “The sky is not the limit for our startup, it’s the target,” Myers adds. “We create sustainable, viable companies that make money.”
Myers recommends every startup needs the following, “A basic brand and market positioning statement that includes what is unique about your product or service. Start simple with a square space template, and create a distinctive mark and look that is relative to your industry or skill. Develop a very basic social and web presence. Estimate the fees for establishing your business, receive an EIN Employer Identification Number, find a lawyer, and possibly even an accountant. Remember to search for trademarks, names, and identities. Most importantly, get something to market rapidly and get feedback, then accelerate or pivot.”
While the last two decades have dramatically changed the startup ecosystem, the quality of the company continues to become increasingly important for success. For founders, being aware of the startup failure rate statistics and potential for growth can help them better prepare as they work to build a high-quality startup.