We sometimes hear that 50% of new businesses don’t make it through their first year. Or that 90% of startups fail.
Maybe. Here’s my take on it for software startups.
First, software and tech startups are not normal small businesses like your local dentist. Startups are abnormal experiments to find a rapidly scalable business.
Startups have a higher failure rate than small businesses because they are supposed to.
And they have much higher rewards than normal businesses.
OK. So do most tech startups fail in the first year? What’s really happening in startup land?
I have a unique perspective that isn’t just from reading headlines about big funding and unicorns.
I track the comprehensive stats of 12 local software ecosystems outside Silicon Valley on Gregslist. And I personally talk to 500+ startup and early-stage founders all over the world every year.
Here’s how I see it, in its simplest form:
- 20% of entrepreneurs with an interesting idea actually build a usable and sellable MVP (product) based on that idea
- 20% of startups with an MVP actually get to 10 paying and happy customers
- 20% of startups with some paying customers ($5K-$15K MRR) actually get to $50K MRR (monthly revenue)
- 20% of software startups with $50K monthly revenue get to $1M annual revenue
- 10% of $1M ARR revenue companies get to $10M ARR (annual revenues)
- 10% of $10M ARR revenue companies get to $100M ARR
- 10% of $100M ARR revenue companies get to $1B ARR
Here’s what this means for founders:
1) The odds are against you from taking your idea to even a $1M software company or bigger.
It probably won’t work, but there’s a chance.
2) I didn’t distinguish here between startups with outside funding vs. bootstrapped and self-funded companies.
I think self-funded companies have better odds of getting to $0-$5M revenue, but VC-funded companies have a better chance of getting from $5M to $100M.
3) Investors know these odds after years of playing this game and placing real bets.
Most early-stage investors would say the odds of progressing in the first few stages are closer to 10% between stages (because they don’t talk to bootstrappers with better odds!).
4) The unicorns we read about are really 1% of 1% of serious startups. At best, it’s less than 5% of massively funded companies that already had serious traction.
5) Founders need to know that this isn’t like progressing through the stages of life (baby, toddler, teenager, young adult, etc.) where it just happens.
It’s more like climbing Everest 50 years ago: very few make it through all the stages despite monumental efforts.
6) Most founders shouldn’t be thinking about building a unicorn or raising big funding.
I don’t think big outside funding increases your odds in the early stages.
Practical founders should be thinking about getting to $1M then $5M revenue without VCs. That’s a $50M valuation or exit with better odds.
That’s how I see the current startup game.