Startup Fail, Scale & Exit Rates in the UK
ETHAN YIP, 15 September 2022
In the UK, it’s been reported that almost 60% of small businesses fail in their first three years of life. The UK private sector is buzzing with ambitious startups and scaleups, from fintech unicorns to innovative university spinouts. But even within the high-growth ecosystem, startup failures are still common.
We’re often asked about the success rates of the businesses that we track on the Beauhurst platform. So here, we’ve explored the proportion of high-growth UK companies that fail, scale and exit within five years of incorporating, and how many simply tread water—neither failing nor scaling. We also look at the average lifetime of companies that shut down or successfully exit, and evaluate which sectors are most commonly associated with startup successes and failures.
The data behind our analysis
We analysed a cohort of private UK companies that were incorporated in 2017 and operating at the Seed stage. All of these businesses have hit at least one of our eight tracking triggers, which are indicators that a company is ambitious or high-growth.
We then assessed the progression of this cohort of companies, using our stage of evolution classifications:
- Seed: new startups, with few employees and limited equity funding.
- Venture: companies that have been around for a few more years, perhaps with more established products/services and likely a valuation in the millions.
- Growth: profitable companies with a multi-million turnover that have been around for at least five years. They’re likely to have secured multiple fundraisings and to be expanding their product range and international activities.
- Established: firms that are 15+ years old, or 5+ years old with three consecutive years of £20m+ turnover or £5m+ profit.
- Zombie: those that have had long periods of inactivity or are suspected to be close to Dead stage.
- Dead: for instance, when a company is dissolved or announces that it’s ceased trading.
- Exited: companies that have exited via an acquisition or initial public offering (IPO).
What proportion of companies scale, fail, exit and stagnate?
Of the 2,582 companies that we assessed, around one in four (23%) successfully scaled within their first five years, having progressed to a later stage of evolution during this time. Perhaps unsurprisingly, those that did scale-up received more equity funding, on average, than those that did not—in terms of both the number (three) and total value of deals secured by each company (£8.53m). The businesses that scaled may have brought in more investment than their peers due to being perceived as having superior product ranges, better metrics, or market readiness. Equally, receiving more investment likely then helped these companies to progress faster.
Just 52 businesses within the cohort (2%) exited the private market, either being acquired or undergoing an IPO. The vast majority of these exit events were acquisitions, with just four companies progressing from Seed stage through to IPO since 2017. The rarity of companies exiting within five years is understandable—most startups are unlikely to be successful enough to warrant an exit at such an early stage, and founders may be reluctant to hand over the reins before seeing their vision come to fruition.
At the other end of the scale, 20% of companies had moved to the Zombie or Dead stages without progressing, and are thus classed as having failed. On average, these businesses secured less than one equity deal each, while the average amount raised was just £289k. It’s rather telling that failed companies raised around half the amount of funding that stagnated companies did (£596k) and only a fraction of that raised by companies that scaled. These businesses that went under were likely less attractive opportunities for investors, and this lack of capital will have impacted their chances of survival.
Interestingly, among the companies that scaled during their first five years, only 16 later moved to the Zombie or Dead stages. Whilst their fates highlight the delicate and risky nature of the high-growth ecosystem, the relatively low number of businesses that ‘scaled but failed’ suggests that those progressing in the earliest years of their development are much more likely to succeed in the long run.
How long did it take for failed companies to go under? These businesses had an average lifetime of 2.94 years, with a fifth of companies struggling to survive just three years on from incorporating. On the other hand, it took the companies that exited just 2.60 years, on average, to progress from the Seed stage to an IPO or acquisition.
The majority (54%) of companies in our cohort stagnated, not progressing beyond the Seed stage in their first five years. On average, these businesses were able to raise £596k worth of equity finance. While the funding was there, these companies may have struggled to find the right market fit for their products or commercialise what were initially deemed good ideas by investors.
National lockdowns and economic uncertainty surrounding the COVID-19 pandemic will also have hindered the progression of many of these businesses early on in their life cycles. And a recent Bloomberg article suggests that current global economic conditions are resulting in limited growth across the UK private sector. So we may well continue to see more startups stagnating in the coming years.
Which high-growth sectors struggle the most?
Consumer travel services and live events companies were the most likely to fail in their early stages, with 37% and 36% of businesses operating in these sectors going under within five years of incorporating. This may come as no surprise, given the blow that COVID-19 dealt to the event and travel industries. Meanwhile, clothing brands (35%) and companies offering educational services (31%) also ranked amongst the most likely to fail.
Which sectors are most likely to succeed?
Companies that exited were mostly operating in tech verticals such as software-as-a-service (SaaS) and internet platforms. This includes the likes of Immotion Group, an East Midlands virtual reality (VR) company, which went public just a year after incorporating in 2017. There were, however, a disproportionate number of tech startups in the cohort, with the technology sector currently accounting for a third of the UK’s high-growth ecosystem. Looking instead at the proportion of companies in each sector, it was online games firms that were most likely to exit within the first five years of their life (14%).
Businesses offering nursing and care services (56%), payment processing (49%) and insurance services (47%) were more likely to have scaled than those in other sectors. For instance, healthtech company Birdie, which develops an online tool for booking at-home care services and medical deliveries for the elderly, first progressed to the Venture stage in November 2018, and then further scaled to the Growth stage in May 2021. It has now secured £43.0m worth of equity investment, across four funding rounds, and has attended numerous accelerator programmes since its founding in July 2017.
What happens to startups in the UK?
As the data shows, early-stage ventures are highly risky undertakings, with the majority of companies stagnating or outright failing within five years. This is, of course, distressing to entrepreneurs and investors at these companies. But while this may seem like a cause for concern, the UK’s high-growth ecosystem is a discovery mechanism for innovative ideas, novel products and new business models—failure is a natural part of this process. Although high company stagnation and failure rates would be disturbing in other parts of the economy, here, it suggests that UK entrepreneurs are continuing to push the boundaries of what’s currently possible.
COVID-19 will have made growth more challenging for many early-stage companies, but the search for a highly scalable business model is always a challenge, regardless of the economic circumstances (many of today’s biggest successes were launched during the 2008-2009 financial crisis). The 23% of companies that have scaled hold promise for the future—successful growth businesses, global innovators, and unicorns will no doubt emerge from their ranks.
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