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Dispelling the myth: the real rates of tech startup survival

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Max Chmyshuk, founder and managing partner at Fleximize, dispels the myths surrounding startups’ failure.

Silicon Valley is famous for many things – not least its mantra of “fail fast, fail often.”

Repeated at technology conferences, recalled in the office ball pool, discussed over a craft beer, failure amongst technology startups is not only seen as a fact of business life but is lauded, considered trendy, enshrined as a kind of rite of passage for all techpreneurs.

Common misconceptions about life at a startup

In part, the ‘celebration’ of failure stems from the common myth that 80% of businesses will fail within their first year.

Linking back to research allegedly cited in Bloomberg – in an article that has mysteriously vanished from the public domain – the statistic first appeared in 2013 in Forbes. The writer states quite pointedly that 8 out of 10 businesses will “crash and burn” within 18 months and the remaining 20% are unlikely to survive past year five.

The issue with this statistic is that it is, in fact, entirely incorrect. Whilst instances like Rebus may seem to disagree, this figure only applies to the microcosm of Silicon Valley. It does not translate to the wider startup landscape. Moreover, business survival rates in the rest of the USA, UK, Australia and Canada prove that the myth does not hold in any of these countries.

For instance, according to the latest Eurostat report, the one-year survival rate for European enterprises actually lies around the 83% mark. Moreover, Europe’s small businesses now employ in excess of 141 million people – something which is predicted to rise because business birth rates are now exceeding death rates.

Likewise, Fleximize’s new report entitled The Real Rates of Business Survival, reveals that an average of 8 out of 10 businesses can expect to survive their first year, and half will still be in business at the end of year five.

Economic climate

Despite a tough economic climate, entrepreneurship is thriving in Europe and technology hubs are booming.

Indeed, tech startups are key drivers of economic recovery, through their ability to stimulate innovation, creativity and alleviate unemployment.

This is further emphasised by the fact investment hit an all-time high in 2015 with angels and VCs breaking records and raising £2.51 billion to fund UK technology companies.

Therefore, whilst statistics vary by geographical location and the industry within which the business is located, the general prospects of success for Europe’s businesses are incredibly high – including for those in technology.

The sectors with the lowest survival rates in the UK are actually finance (85% survive year one but only 39% survive to year five), and accommodation and food sectors (91%, 33%). On the other hand, in both the UK and US, healthcare and education have the most stable five-year trajectories.

Admittedly, when it comes to the tech sector, Fleximize’s report does highlight that only around 45% of startups in the UK and 43% in the US survive to their fifth year. But it’s essential to note that this is still significantly higher than the alleged failure rate proposed by Forbes.

Challenges

It is also imperative that we recognise that tech startups are not so dissimilar from those in other sectors; they still face challenges throughout their lifespan. Regardless of product, raising funding, managing cash flow, negotiating government regulations, increasing profit and growing revenue are all essential requirements for a successful business.

Across all sectors financing is the biggest killer of young companies – with 63% struggling with taxation, VAT, and other forms of monetary strain. This issue is particularly prominent in Europe given that banks now refuse loans to a large percentage of SME applicants and startups. For example, in 2013, the number of bank loans to SMEs fell by a substantial €232m, peaking with figures such as the €99bn drop in loans in Spain to non-financial corporations decreased likewise by €50bn in Italy.

With a wane in the ability and willingness of conventional European banks to fund small and new businesses since the financial crisis of 2007-8, alternative finance platforms, including crowdfunding, alternative lending, and peer-to-peer platforms have emerged as viable alternatives for companies seeking funding. With the UK’s alternative finance market topping £3.2bn in 2015 and Europe’s €1.3bn, it’s clear how this represents a poignant resource for startups.

Funding options

Putting a finger on the best alternative funding option for an individual business of course depends on several aspects: size, growth strategy, product, as well as the owner’s vision. For example, for a company with a lot of assets like property or livestock, debt financing works for both entrepreneur and lender. On the other hand, technology startups and seed-level companies may not want to take out a loan initially, instead preferring to raise money through equity – angels or the crowd – because not only do they have very few assets but receiving this kind of finance can improve their solvency earlier.

Crowdfunding, in particular, has been a popular provider of capital for early-stage tech businesses with high-growth potential. Equity crowdfunding now accounts for €82.56m in transactions with further €130m in donations-based and reward-based crowdfunding in Europe (excluding the UK). Leading European crowdfunding platforms are, according to a report by Accaglobal, doubling the size of their books every six months.

Peer-to-peer business loans, similarly, accounts for over £2bn in the UK in 2015 and are suitable for more established businesses of all kinds. Operating more like bank loans than cash injections, these are funded by direct lenders from ‘the crowd’ in a process similar to equity or rewards based crowdfunding.

Flexible business loans are a great option for businesses seeking money to fund working capital or new investment, but are not able or willing to wait weeks to get a decision from their bank or have already been turned down.

Ultimately, SMEs are more resilient today than ever, with more options for flexible capital available and more adaptable when it comes to unforeseen obstacles. With new forms of finance available, startups are making the most of innovative solutions. More are surviving than ever before.

Technology startups are no different. The appetite for creating new businesses has grown exponentially and the rate of dissolution has fallen.

Failures will still happen – in the first year, the first five, and many years after that. There are challenges and obstacles at every stage of the business lifecycle. But it is time to scrap that cautionary tale of how 8 out of 10 startups fail. It is time to recognise their success and contribution, not as lessons in failure, but as a bolster to the economy and to business growth.

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