18 MAR, 2024

New Business Ideas Get Harder

2-MINUTE READ

It's never been smooth sailing, but the numbers provide a bleak outlook: the difficulty for entrepreneurs will only rise. 

The failure rate of new business ideas over time:

74.0%

74.0%

92.6%

92.6%

2000

2005

2010

2015

Note: The vertical axis starts at 50% to emphasize the trend.
The method behind this analysis is described in the appendix.

It's our fault. We could live the mundane yet uncomplicated life of hunter-gatherers. Instead, we went after progress by taking advantage of knowledge accumulation — the ability neither chimpanzees nor any other creature possesses

Idea by idea, stacked on top of one another — it's how we push our world forward. Our hands, which used to grip a hammerstone to crack something, today hold a smartphone to call an Uber. Both are outcomes of our inventiveness but are unlike in their complexity.  

We've been getting better at meeting our needs to the extent that we've hit the ceiling on many fronts. After moving from deliveries counted in days to shopping brought by Flink in minutes, we are at the point where cutting extra time won't change much. 

It's time to tackle unsolved problems instead of pushing the envelope in areas filled with self-contentment. Plenty of issues are waiting to be cracked, yet it will demand more sweat. 

The blend of complexity and hurdles calls for more resources of all types:

  • More people: Extensive collaboration becomes a necessity, which is best illustrated by the scientific circle. Since the turn of the millennium, the average number of coauthors on a multidisciplinary research paper has increased from 2.7 to 5.4. If it's not impressive, take notice of the paper on an improved measurement of the Higgs boson mass, which has 5,154 authors. It's what pushing back the frontiers means.

  • More time: At other times, an idea cries out for a lengthy period to bring in a solution. In the case of Hövding, the maker of the safest cyclist "helmet" in the form of an airbag, it took 7 years to move from an idea to the shopping shelves.

  • More money: Expanding teams and drawn-out timeframes aren't the only reasons behind swelling funding. A growing number of ideas requires cutting-edge technology that ramps up capital expenditure. For instance, Starlink, in an attempt to deliver satellite internet to most remote parts of the globe, estimates $10 billion in setup costs.

But, but, but! A shipped solution is only half the battle. The home run is to make a profit. And even turbocharged by a breakthrough idea, it could be a struggle. Since its commercial kick-off in 2020, Starlink has brought only $1.6 billion in revenue, which keeps it far from breaking even. 

But even without their audacity, those who consider bringing new business ideas to life should prepare for more blood, sweat, and tears.

by Gustaw Jot

APPENDIX: methodology of this study

Context: Measuring such a phenomenon as the success rate of new ideas is no mean feat. The official indicator is missing, and big companies keep such information out of sight. At the same time, small risk-takers have other worries than providing data for curious minds. So, I had to find a proxy for the analysis.

The data produced by venture capital funds has become a good trail. Why? These funds exist to invest money in promising ideas pitched by startups and hope for a return on their bets. The nature of their activity brings a strict definition of success: to build a new company to sell it for more money than invested. They have a fancy name for it: an exit.

Database selection: The choice came from the most comprehensive and up-to-date comparison of available sources. According to the research paper by Andre Retterath and Reiner Braun from the Center for Entrepreneurial and Financial Studies at Technical University in Munich, the most accurate ones are VentureSource, Pitchbook, and Crunchbase. Since Dow Jones withdrew VentureSource, I stuck to Crunchbase as the most dimension-rich database, with high-level results double-checking with Pitchbook.

Metrics definition: Venture capital funds classify the maturity level of backed startups. What is more, they have a specific category for early-stage ventures. It's called seed funding

After reviewing the detailed criteria behind the classification process, I've decided to use the seed funding category as it aligns with the purpose of this investigation.

To analyze failure, I had to clarify what counts for success. In the venture capital world, it's straightforward: an exit in the form of an Initial Public Offering (IPO) or Merger & Acquisition (M&A). 

The last part was to establish a timeframe for the analysis. That was crucial as it takes time to launch a startup, build its market position, and grow its worth to make an exit. The cohort analysis of the average time-to-exit gave me a reasonable cutoff date: December 31, 2015. 

Average time-to-exit [in years] for startups funded in a given year:

11.7

11.7

11.3

11.3

9.8

9.8

11.1

11.1

10.8

10.8

12.5

12.5

9.3

9.3

9.1

9.1

8.5

8.5

7.3

7.3

7.6

7.6

6.9

6.9

7.0

7.0

6.0

6.0

5.1

5.1

4.4

4.4

2000

2005

2010

2015


Considering the downward trend, a 7-year buffer (2016-2022) seems quite a safe exclusion in my analysis. That gives a base of n = 53 845.

To sum up: The study was conducted in early 2023 and is based on startups funded between 1990 and 2015, backed by seed funding, and covered in the Crunchbase.

Pssst! If you spot any inconsistency in my logic or see an opportunity to make this study even more reliable, please reach out via Linkedin.

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