The Venture Capitalist Secret: Three Out of Four Start-Ups Fail

Overall, nonventure-backed companies fail more than venture-backed companies in the first four years of existence. But, there is new evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites, the Wall Street Journal is reporting. About three-quarters of venture-backed firms in the U.S. don't return investors' capital, recent research from Harvard Business School senior lecturer Shikhar Ghosh suggests. Venture capitalists "bury their dead very quietly," Ghosh says, "They emphasize the successes, but they don't talk about the failure at all."

Venture-backed companies tend to fail following their fourth years -- after investors stop injecting more capital, he says. The common rule of thumb among venture capitalists is that of 10 start-ups, only three or four fail completely, another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates between 25 to 30 percent of venture-backed businesses fail. Ghosh says the discrepancy between the numbers is in part due to a dearth of in-depth research into failures. His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also reviewed VC firm portfolios and interviewed people at start-ups.

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