Dan Richards is a serial founder and former public company CEO, and an award-winning member of the marketing faculty at the Rotman School of Management, where he oversees the credit course associated with MBA student internships.<\/p>\n
Among the benefits of teaching at a business school are invitations to judge the many startup pitch competitions that have sprung up at universities. The energy in those rooms is infectious as students arrive armed with bold aspirations, clever demos and the conviction that their idea is different. Occasionally it is. Mostly it\u2019s not. Either way, the drive and creativity on display is remarkable.<\/p>\n
But behind the passion of these student founders lies an uncomfortable truth: their chances of achieving big time success and valuations in the hundreds of millions of dollars are lower than they believe – in fact, much, much lower.<\/p>\n
The true odds of startup success<\/p>\n
The statistic most commonly cited in startup circles is that 10 per cent of startups succeed, and roughly 1 per cent become \u201cunicorns,\u201d achieving valuations of $1-billion or more. These stats have been repeated so often that they\u2019ve become accepted as gospel. The truth is that both figures are deeply misleading.<\/p>\n
The 10 per cent success rate comes from research by Startup Genome, which measured the proportion of venture-capital-funded startups that achieved a successful exit. The unicorn figure is drawn from CB Insights\u2019 analysis of companies that reached a billion-dollar valuation. <\/p>\n
On the surface, these sound like rigorous benchmarks. The problem is that both statistics are calculated from a narrow slice of the startup universe: companies that receive venture capital.<\/p>\n
The truth is that venture funding is extraordinarily rare. Marc Andreessen of Andreessen Horowitz has noted that roughly one out of every 130 companies that apply for VC funding receive it. A Harvard Business Review article<\/a> arrives at a similar conclusion: Only about 1 per cent of companies seeking VC funding succeed in raising it.<\/p>\n Once you combine those figures, the math changes dramatically. If only 1 per cent of startups that apply for VC funding get funded, and only about 10 per cent of funded startups achieve a successful exit, then the odds of \u201csuccess\u201d – as defined by the VC ecosystem – are closer to one in 1,000, not one in 10. As for the chances of reaching a billion-dollar valuation, because 1 per cent of VC funded startups become unicorns, the odds of achieving that drop to one in 10,000 companies that approach VCs for funding. <\/p>\n And that\u2019s for startups that even reach the stage of pitching venture capitalists, a stage that most never reach. This doesn\u2019t mean that the ambition to start a company shouldn\u2019t be encouraged. But it does mean we need to be honest about the true chances of success – and about how narrowly success is being defined.<\/p>\n Redefining what success means <\/p>\n That brings us to a second problem: founders and investors often mean different things when they talk about success.<\/p>\n Imagine telling two students that they could build a company that demanded five years of gruelling 100-hour weeks, but ultimately spun off $5-million in cash without external funding. Most students would leap at the chance to gain financial independence, professional credibility and the freedom to choose what comes next.<\/p>\n Most venture capitalists, however, would view that result as a failure.<\/p>\n The reason is structural. Venture capital is governed by a power-law distribution where a small number of massive wins compensate for a large number of total losses. From a VC\u2019s perspective, a $5-million outcome barely moves the needle. <\/p>\n Even a $50-million exit may be disappointing. I recently spoke with a founder who was thrilled to sell his company for $50-million, over ruling investors who urged him to raise another round, accelerate growth and chase a much higher valuation. He declined. Quite simply, their incentives were misaligned.<\/p>\n This is a conversation I regularly have with students. When they tell me they want to start a company, I ask a simple question: What does success look like to you?<\/p>\n If success means acceptance into a top incubator such as Y Combinator, raising multiple VC rounds and reaching a $200- or $300-million valuation, then the odds are brutally tough. <\/p>\n But if success is defined more broadly, the picture changes. <\/p>\n Building a sustainable, profitable business. Solving a meaningful problem. Creating stable employment. Learning skills that compound over a lifetime. Establishing a platform for future opportunities. These outcomes are far more attainable than the unicorn narrative suggests.<\/p>\n I was reminded of this by a recent podcast featuring Andrew Wilkinson, the Victoria-based co-founder of Tiny, a holding company that has acquired three dozen profitable internet and consumer brands. A key message was to look for opportunities that are achievable without needing to look for massive external funding. <\/p>\n When we equate startups exclusively with venture funding and hypergrowth, we obscure the many other paths to success that entrepreneurship can offer. The truth is not that startups are doomed. It\u2019s that the odds depend entirely on how you define the game you\u2019re playing. And that may be among the most important lessons a business school can teach.<\/p>\n This column is part of Globe Careers\u2019 Leadership Lab series, where executives and experts share their views and advice about the world of work. Find all Leadership Lab stories at tgam.ca\/leadershiplab and guidelines for how to contribute to the column <\/a>here<\/a>. <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Dan Richards is a serial founder and former public company CEO, and an award-winning member of the marketing…\n","protected":false},"author":2,"featured_media":424113,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[45,49,48,137,2922,4081],"class_list":{"0":"post-424112","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-entrepreneurship","8":"tag-business","9":"tag-ca","10":"tag-canada","11":"tag-entrepreneurship","12":"tag-noastack","13":"tag-ordid20000"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/424112","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=424112"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/424112\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/424113"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=424112"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=424112"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=424112"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}