How many startups get venture funding?
Many promising startups seek venture capital as a way to secure investment, but it's extremely competitive and rare. A mere 0.05% of startups get VC funding.
A Quick Guide to Startup Funding. Raising money from a Venture Capital (VC) firm is extremely challenging. The odds of receiving an equity check from Andreessen Horowitz is just 0.7% (see below), and the chances of your startup being successful after that are only 8%. Combined, that's a 0.05% or 1 in 2000 success rate.
In very general terms, roughly 1,500 startups get funded by venture capitalists in the US, and 50,000 by angel investors. VCs look at around 400 companies for every one in which they invest; angels look at 40.
In 2021 and 2022, the number of startups that attained a billion dollar valuation were 44 and 26, respectively. There was a sharp decline in startup funding from $25 billion in 2022 and $38 billion in 2021 to $11 billion in 2023. The number of deals also dropped from 1,625 in 2021 to 1,556 in 2022 and 984 in 2023.
16% of Series E startups are acquired. Startups don't usually start getting acquired until Series E, and at that point, less than 20% of startups remain. Any startup below a Series E is far more likely to fail than to ever be acquired.
The average venture capital firm receives more than 1,000 proposals per year. Approximately 30% of startups with venture backing end up failing. Around 75% of all fintech startups crash within two decades. Startups in the technology industry have the highest failure rate in the United States.
According to a study by Crunchbase, only 0.05% of startups that apply for venture capital funding actually receive it. There are a number of reasons why raising venture capital is so difficult. First, VCs are looking for startups that have a high potential for growth and success.
Markets have shifted and founders must respond accordingly.
Aspiring entrepreneurs are facing a worrying trend: venture capital (VC) funding is drying up. The current macroeconomic environment is driving up the cost of capital, making venture capitalists more reserved on the investments they are willing to make.
The past two years have been a time of significant change in the venture ecosystem, with a record-breaking flurry of funding activity in 2021 giving way to a market slowdown in late 2022 and into 2023. But not every sector has experienced that slowdown the same way.
According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.
Why is it hard for startups to get funding?
For starters, startups are often unproven businesses with no track record of success. This makes it difficult for investors to assess the potential for return on their investment. Secondly, startups typically have little to no revenue and are often reliant on external funding to keep them afloat.
On average, 63% of tech startups don't make it, 25% close down during the first year, and only 10% survive in the long run. Venture-backed fintech startups fail in 75% of cases.
How much money is involved in seed funding? Seed funding is usually between $500,000 and $2 million, but it may be more or less, depending on the company. The typical valuation for a company raising a seed round is between $3 million and $6 million.
Startup Failure Rates
About 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.
75% of founders who faced potential business failures admitted that their company was not adequately prepared to be in business. Over half of all founders we surveyed believed that running out of money led to failure.
One of the biggest reasons why startups fail is that founders overestimate their products. Finding the market fit of a new startup takes 2 to 3 times longer than many founders anticipate. Meanwhile, founders often overestimate the value of their intellectual property before product-market fit—by as much as 255%.
The National Bureau of Economic Research has stated that a 25 percent return on a venture capital investment is the average. Most venture capitalists or venture capital returns will expect to at least receive this 25 percent return on investment.
They expect a return of between 25% and 35% per year over the lifetime of the investment. Because these investments represent such a tiny part of the institutional investors' portfolios, venture capitalists have a lot of latitude.
Several articles and research papers have been published on the PME and the comparison of VC versus public stock performance. These studies often show that top-tier Venture Capital funds outperform public markets, while the median or average VC fund may underperform.
A typical VC firm manages about $207 million in venture capital per year for its investors. On average, a single fund contains $135 million. This capital is usually spread between 30-80 startups, though some funds are entirely invested into a single company, and others are spread between hundreds of startups.
How long is a typical VC fund?
Venture capital funds typically have long tenures, beginning the first closing and running for 8-10 years. Fund managers usually seek pre-determined extension periods (2-3 years for example) to allow them for a smooth exit from all investments.
According to a study by the National Venture Capital Association, the average time it takes for a VC firm to get back their investment is 7.1 years. However, this number can vary significantly, with some investments returning profits in as little as 3 years and others taking as long as 10 years or more.
Successful startup founders have the highest success rates on their VC investments, nearly 30 percent. They are followed by professional VCs at just over 23 percent, and unsuccessful founder-VCs at just over 19 percent.
In 2023, 58% of venture capital has been deployed in investors' home markets. This is the highest percentage of domestic market investment of any year, and higher even than locked down 2020 (55%).
Turning our attention to the value of VC, the outlook for 2023 is less optimistic. In contrast to the steadiness observed in VC deal numbers, the dollars invested in venture capital is projected to experience a significant decline in 2023, potentially one third less than in 2022.