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Can you afford to fail?

parachute-skydiving-parachuting-jumping-128880Business Insider posted an article about failed startups in 2015: Business Insider failed startups 2015. According to that article, 90% of start-ups fail.

A project co-authored by Berkeley & Stanford faculty members, together with Steve Blank and 10 start-up accelerators as contributors, analysed 3,200 high-growth web/mobile start-ups and found that within 3 years, 92% of the start-ups had failed.

Other sources claim that, given 10 start-ups, only three or four will fail completely, while another three or four will return the original investment, and one or two will produce substantial returns.

I think, in practice, one can safely assume that only 10–20% of start-ups actually produce a substantial return for the founder. On the other hand, a lot of people who I meet are still very interested in building their own start-up. For me, this is a similar kind of phenomenon to the case of many people liking to play the lottery, although everybody knows that it is very unlikely they will win the substantial money possible. However, one major difference is that, in the case of launching a start-up, you typically invest much more than just the small money you would use to purchase a lottery ticket and the consequences of your start-up failing can be dramatic if you are not prepared for that possibility.

Therefore, at least for me, the first question is not about whether you have a great idea about a future business opportunity – many people have great ideas –, instead the first question should be, “Can you afford to fail?”. If you are not absolutely sure about that, then you should fully investigate this question BEFORE you start your business. Your changes of failing are somewhere between 50% and 80%, so you should be prepared for this worst case scenario!

Next post: Build a platform, not a feature.

 

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