Debunking the Myth: Why the “90% of All Startups Fail” Statement Is Misleading and Harmful
The belief that 90% of all startups fail has become a widespread assumption. This statistic is often quoted in discussions about entrepreneurship, painting a dark picture of the startup landscape. However, this figure is misleading and harmful to the growth and innovation that startups bring to the economy. In reality, success rates are significantly higher.
Understanding the Origins of the Myth
The 90% failure rate may be based on the failure rates of venture capital-backed companies, which are, indeed, around 90%: Only about 10% of the companies VCs invest in will generate positive returns, so the others are considered failures.
However, failing to make a profit for the investor doesn't mean the company is a failure. Even a VC-funded company can operate very successfully, but the VC can't find a buyer — it's thus considered a failure.
The Reality Behind Startup Success Rates
Data from sources like the U.S. Bureau of Labor Statistics and EU and Swiss business demographics paint a different picture: In the U.S. and Switzerland, approximately 50% of new businesses survive at least five years, about one-third make it to ten years or more, and about 20% live 20 years or longer. Other countries report significantly higher (e.g., Sweden) or lower survival rates (e.g., some Eastern Europe countries).
Success rates also vary widely across industries and economic conditions. Silicon Valley, venture capital-funded companies, for instance, have a somewhat lower success rate (about 2/3rds of the average newly founded company - but still much higher than these famous 10%).
Defining Success and Failure Accurately
These statistics show the number of companies that still exist, but they do not explain whysome companies ceased to exist.
In Switzerland, closing can be attributed to about one-third of liquidations, one-third of selling, and one-third of bankruptcy. Assuming that selling a company to another one is a success and not a failure, the success rates increase further.
About 63% of the startups are successful after five years, around 44% after 10 years, and more than 25% after 20 years.
The Harmful Effects of the Misconception
Continuous repetition of the 90% failure myth has several negative consequences:
- Discouraging Potential Entrepreneurs: Such low odds may intimidate aspiring founders, leading them to abandon innovative ideas that could contribute positively to the economy.
- Influencing Investor Decisions: Investors might become overly cautious, reducing funding opportunities for startups that need support to develop and scale their solutions.
- Creating a Fear-Based Narrative: This misconception contributes to a culture of fear around entrepreneurship, overshadowing the potential rewards and benefits that startups can provide.
Promoting Correct Data
A more accurate understanding of startup outcomes encourages informed decision-making. Recognizing the varied paths and possibilities allows entrepreneurs to prepare better, adapt, and seek appropriate support. It also helps investors identify and fund promising ventures without being clouded by unfounded pessimism.