THE INCONVENIENT TRUTH: MOST STARTUPS FAIL

BY Lauren LeibowitzPrincipal at 1st BridgeHouse Securities, LLC, CrowdfundBeat Sr. Guest editor,

This blog is a part of a 3 blog series. Click here to read Part 1: The apples and oranges of Crowdfunding – Reward/ Donation Crowdfunding is not investing.

ebr insta 0715

PART 2: THE INCONVENIENT TRUTH: MOST STARTUPS FAIL

The Risk Vs Reward tradeoff in the PIPR Market

Startups can fail for many different reasons and most do!  Within the Final Regulation Crowdfunding Rules, the SEC comments about theSurvival Rates for Startups and Small Businesses

Startups and small businesses that lack tangible assets or business experience needed to obtain conventional financing might turn to securities-based crowdfunding in reliance on Section 4(a)(6) as an attractive potential source of financing. There is broad evidence that many of these potential issuers are likely to fail after receiving funding. For example, a 2010 study reports that of a random sample of 4,022 new high-technology businesses started in 2004, only 68% survived by the end of 2008.

Similarly, other studies suggest that startups and small businesses financed by venture capitalists also tend to have high failure rates. One study finds that for 16,315 VC-backed companies that received their first institutional funding round between 1980 and 1999, approximately one-third failed after the first funding round. Additionally, another study of more than 2,000 companies that received at least $1 million in venture funding, from 2004 through 2010, finds that almost three-quarters of these companies failed.1304 Another study, based on a sample ending in 2005, found cumulative failure rates of 34.1% for VC-financed firms and 66.3% for non-VC-financed firms, with the difference driven by lower failure rates of VC financed firms in the initial years after receiving VC financing.

Taken all together, the failure rates documented in these studies are high for startups and small businesses, even with the involvement of sophisticated investors like VCs. Because we expect that issuers that will engage in offerings made in reliance on Section 4(a)(6) will be in an earlier stage of business development than the businesses included in the above studies, we believe that issuers that engage in securities-based crowdfunding may have higher failure rates than those in the studies cited above.”

Now as you are fully aware of the startup failure risk, it is important for prospective investors to learn and research as much about the company, its management, the market, and its future plan prior to making an investment.  From the beginning of investing in small businesses and startups, the odds are against you. Since there is a lot of risk then the trade off, the reward could be very lucrative but do not discredit the historical rate of startup failures.

Final Thought

Caveat Emptor- [Latin, Let the buyer beware.] A warning that notifies a buyer that the goods he or she is buying are “as is,” or subject to all defects.

Tags: , , , , , , , ,

HEADLINE NEWS

ZDNet$300 Windows 10 Surface Pro lookalike makes its crowdfunding debutZDNetChuwi's SurBook is a low-price 2-in-1 tablet PC. Image: Chuwi. In the wake of the Microsoft Surface Pro unveiling in Shanghai, Chinese hardware maker Chuwi has launched its crowdfunding campaign for a Sur [...]

Business InsiderA crowdfunding campaign to support the families of Manchester attack victims has raised £750000 in a single dayBusiness InsiderA crowdfunding campaign to raise money to provide support for the families of those injured and killed in the Manchester terrorist attack has [...]

TIMECrowdfunding Campaign Raises $55000 for Homeless Man who Helped Manchester Terror Attack VictimsTIMEA series of crowdfunding campaigns have raised more than £42,400 ($54,800) in support of a homeless man who said he rushed to the aid of people wounded in Monday night's suicid [...]

QuartzDonating to my older sister's friend: Crowdfunding is paying for urgent healthcare in ChinaQuartzHolding her six-year-old son, Deng Na's looks into the camera, her face both tired and determined. The picture accompanying the online crowdfunding call for her son Chen Ju [...]

Marketplace.orgCrowdfunding has created a whole new consulting industryMarketplace.orgWhen crowdfunding sites like Kickstarter and Indiegogo first got their start, the idea was that all an entrepreneur needed was a cell-phone camera and a dream.and more » [...]

seattlepi.comCrowdfunding campaign hopes to save Belltown grunge mecca ...seattlepi.com2316 2nd Avenue, the building housing blacksmith shop Black Dog Forge and the rehearsal space beneath it that once hosted the likes of Soundgarden, Pearl ...and more » [...]

VultureAdam Carolla Is Crowdfunding Doc Criticizing Safe Spaces - VultureVultureThe widely documented protests against conservative and right-leaning guest speakers at universities and the escalating violence revolving around the free ...Adam Carolla Launches Crowdfunding Campaign for [...]

KTALTexas lawmaker starts crowdfunding campaign for school lunches -KTALA state lawmaker is looking for donations to pay off debt Texas students rack up in school cafeterias.and more » [...]

Commerce JournalHall stands alone in vote against rape kit crowdfundingCommerce JournalHall released the following statement on the vote to the Commerce Journal by email on Friday: “Rape kit testing is far too important to rely on an undependable funding source like crowdfunding. This [...]

New York MagazineFacebook Rolls Out Crowdfunding to EveryoneNew York MagazineDepending on your perspective, the rise in popularity of crowdfunding is either a fantastic new way that the internet lets strangers help each other out, or emblematic of the decay of institutional safeguards [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

CrowdFund Beat Media

Municipal Debt Crowdfunding Startup Neighborly Quadruples Capital with $25M Series A Round upflow.co/l/43fJ pic.twitter.com/mxt5tCqYzm

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |