I’ve written much over the years about the incredible success of Y Combinator startups, but as any experienced startup founder or investor knows, there is a dark side to technology innovation… lots of startups just don’t make it :(
At Rebel Fund, our job is to invest in the top 5–10% of new Y Combinator startups each year, so we devote most our efforts to identifying and supporting what we believe to be the most promising technology startups in our ecosystem. Given the power law dynamic and asymmetric risk/return profile¹ of venture investing, we care much more about the magnitude of our successes than the number of our failures, but since the latter still matters, this post will focus on the proportion of YC startups that ultimately fail.
The chart below illustrates the percentage of YC startups that are active (i.e., still operating), inactive (i.e., failed), or public/acquired (i.e., exited) by batch since the incubator’s founding in 2005.
The blue bars (active) decline sharply going back in time as more startups reach their ultimate resolution. They don’t really stabilize until the ~12 year mark, by which point ~88% of startups have either shut down or exited. This means that only ~7% of startups from a given vintage reach resolution each year.
After the ~12 year mark, here’s the breakdown of YC startups by status:
By this point half of the startups have failed, over one-third of them have exited, and the remainder are still operating².
There is an expression in venture investing “the lemons ripen early” which is to say your failed investments tend to show themselves before the successful ones do. This does seem to ring true for YC startups, but only in the first couple years of their life cycle.
Below we’ve removed active companies from the first chart to only show the resolved ones. Here we can see that indeed some companies start failing soon after inception, but once a couple of years have passed, the inactive vs public/acquired ratio seems to stabilize around 55:45. This means that after a couple of years of survival, a YC company is nearly as likely to end up exited as failed in any given year, which is better than I expected!³
I wrote this post because I’m often asked by Rebel investors what the failure rate is for YC startups and how long it takes them to either exit or shut down, so now you know.
Early-stage venture investors can safely ignore it though, because how many 100x investments are in your portfolio matters way more than how many 0x investments you have.
YC founders can ignore it too, because it shouldn’t matter how many of your peers succeed or fail — just whether you do ;)
¹The fun thing about startup investing is the upside is virtually unbounded but the downside is limited to 1x invested capital
²Most of their investors have written them off by now though, as startups this old are more likely to be “zombies” than unicorns-in-waiting
³Note that all exits are treated equally for the purposes of this analysis, from acqui-hires to multi-billion dollar IPOs, though the latter is obviously much more meaningful to founders and early investors than the former