In 2018, Enterprise Research found that almost half (45.3%) of startups don’t survive beyond three years. Of the 32,200 companies that we have tracked due to meeting one of our growth triggers, only 13% have died (15% if we include zombie companies). 7% have gone on to a successful exit, and the remaining 78% are still actively growing. So how do our growth triggers affect the survival and death rate of companies that we track?
In this post, we’ve looked at startups that met one of our tracking triggers in 2011, while they were still seed stage companies. Since then, these startups have had plenty of time to grow, develop and evolve into much larger businesses. The most successful have managed to generate significant turnover, completed IPOs, or been acquired by large corporates. Others have not seen such positive growth; some have remained stagnant and failed to progress beyond the seed stage of evolution, or have dropped off the grid and become so-called ‘zombie’ companies, whilst others have had to officially shut up shop and ceased trading entirely.
A 10% exit rate, as evidenced below, is what we would expect for equity investors. This means that a venture capital firm might have 10 startups in one portfolio in the hope that just one will make big returns for them, covering the costs of the less successful ventures and making them a massive profit. This high-risk, high-reward approach is in-keeping with the 25% death rate of this cohort, higher than the average across all tracked companies on Beauhurst.
We’ve previously looked at a larger cohort of 2011 fundraisers in our startups of yester-year blog series. Those figures are slightly more positive than the ones mentioned here, as these stats only refer to the companies that raised equity whilst in their seed stage, and thus had less traction to begin with.
Government bodies like Innovate UK award grants to companies that are developing pioneering technologies that will benefit society. These grants are made in arrears, so the recipient companies will need some cash flow in order to cover the initial costs.
Most of the 2011 grant recipients have progressed from seed to venture, growth or established stages of evolution, with the death rate hovering just above the Beauhurst average.
It’s no surprise that spinout companies are the least likely to have progressed past the venture stage of evolution. By nature, these IP heavy companies often require more time and capital to develop their innovative products. This is reflected in the fact that, 8 years on, approximately 66% of all academic spinouts are still in the seed or venture stages, the highest rate across all the tracking triggers. However, more pleasingly, this group sees the highest rate of successful exits than any other trigger category.
Companies that attended an accelerator have the highest death rates, suggesting that the programmes did not offer them the same long term support as other high-growth strategies, like raising equity and utilising large grants.
However, it’s worth noting that accelerator programmes have rather drastically transformed over the past 8 years. As the programmes have increased in popularity, they have also become more selective of the companies that are accepted into the scheme. Many programmes, such as King’s20, now also conclude with a pitch day, encouraging investors to help support their cohort of startups into the future. See our recent report on the accelerator landscape here.
Meeting multiple triggers
The effect of combining support mechanisms is very clear. Using the example above, companies that attended an accelerator in 2011 and took on equity investment at some point in their growth journey have a death rate of just 13%, less than a third of the rate seen for accelerator attendees who didn’t secure any equity.
In fact, combining support mechanisms increases survival rates across almost every permutation. To begin with, these companies have to go through different due diligence processes in order to secure each method of support. For example, granting bodies are looking for innovative companies, whilst equity investors are looking for companies that have potential for commercial success. The companies that make it through multiple processes are therefore validated as some of the most well rounded startups that have great chances of success. On top of this, they then receive external money and resources to help them scale the business to its full potential.
The one marked exception to the rule seems to be those that have received an innovation grant and equity investment, who exhibit higher death rates than those that just received a grant. It’s possible that equity investors accelerated the growth (and eventual demise) of these companies. Indeed, there’s a smaller proportion of companies left in the seed stage, and a higher proportion of exited companies too. However, on a more positive note, companies that have received both an Innovate UK grant and equity investment have a higher valuation on average than companies that have received only equity investment.
There are many growth strategies available to UK companies with ambition, and they can lead to large changes in the growth trajectory that a company follows, and the speed at which it develops. These methods of support generally elevate the chances of success, making the companies that have undergone the significant due diligence carried out by investors, grant bodies and accelerators, the ones to watch.