This page adds substance to some of the facts, figures, and quotes used throughout this website. If you would like more information on a particular area, please make contact. See also the Works Cited Page for an expanding base of information on the subject of conflict in small business.
Resologics is using 34% as the percentage of venture backed startups that fail due to negative conflict outcomes in the team. This end note is an effort to show where that number comes from.
We have taken (55.7% average failure rate) X (61% failure due to conflict rate) = a final figure of 33.97% of all funded startups failing due to conflict and people problems within the team.
Sources for data on startup failures quote figures that are all over the map. From low estimates in the 15% range to high estimates in the 97% range and just about everything in between. Definitions of what failure is come into play as do factors like the timing of funding, the incubation environment provided or not provided, size of the investment, business sector, the number of years allowed in failure study, etc... Because of this range of numbers we have made the decision to take three figures that we believe to be reputable and within similar startup markets and average them to render the overall failure rate. 40%, 75% and 52% (see failure rates below) average at 55.7% rate of failure.
Failure Rates: (1) It is estimated that: 40 percent of venture backed companies fail; 40 percent return moderate amounts of capital; 20 percent or less produce high returns (National Venture Capital Association) (2) "Based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010, approx. 75% of venture-backed firms in the U.S. don't return investors' capital. There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh's research." (Shikhar Ghosh, Harvard & WSJ) (3) "A November, 2007 academic study of angel investments found that angels lose some or all of their money in 52 percent of their investment deals because the companies go out of business. The most sophisticated angels make at least ten investments in order to make a return on their investment, counting on one or two to provide nearly all of their return." (Angel Capital Association)
Failure Due to Conflict: Reasons for success and failure are a constant source of debate. Some lists about failure reasons are 10 items long while others are 25 or more. Many of them contain the same easons for failure while some contain just a few to prove a specific point to watch out for. While agreeing that there are many, many reasons that a startup may fail, we'd like to point to a growing field of research that shows that conflict and people problems within the team is a substantial contributing factor. In some cases the studies point to subtle disharmonies that caused disruptions and poor communications leading to failure while some point to destructive conflict situations that bring down a team in a cascade of events visible to many.
We use a figure of 61% due to the research and work done in three studies. One extensive study of what causes "people problems" in high potential startups was recently made by Harvard Professor Noam Wasserman and the other two were outlined in his recent book about these dilemmas high potential startups face. (Wasserman, Noam. The Founder’s Dilemmas. New Jersey: Princeton University Press, 2012.)
"(Gorman and Sahlman, 1989) The authors surveyed 49 well established venture capitalists (VCs) about 96 of their portfolio companies that either had failed or were in danger of failing and asked the VCs to choose up to 3 out of a choice of 11 factors that were the major contributors to these companies' difficulties. For 91 of 96 companies (i.e., 95%), the VCs cited problems within the management team as a top-three contributing factor, ranking it the most important contributing factor for 61 of those companies (i.e., 65%)."
"Kaplan et al., 2004) The authors of this study analyzed 67 internal investment memoranda from 11 VC firms and categorized the various analyses of internal, external, and implementation strengths and weaknesses. The internal weaknesses that led the list for 61% of the startups included such items as "CEO is a rather difficult person," "Incomplete management team," and "Must strengthen management team and ensure involvement of VC as chairman. Will have to hire CEO." (Wasserman, Notes-2)
Many other studies measure costs of conflict without converting to a percentage of failures due to conflict. These are critical in understanding the entire picture of conflict costs in a startup business. In particular a recent article by Helmut Buss in the International Ombudsman Association Journal highlights the costs of conflict and works effectively with a number of studies to outline: productivity rates dealing with poorly managed conflict using up up to 8.3% of workers time and from 30-70 percent of managers time; turnover rates with conflict being the decisive factor in departures in at least 50% of cases; absenteeism factors; reputation costs, etc... (Buss,Helmut. Controlling Conflict Costs: The Business Case of Conflict Management. International Ombudsman Association Journal, Volume 4, number 1, 2011, pgs 54-62.)
Number of Investor Backed Startups in 2007/2010 (This number is for illustration purposes only and has no bearing on the percentage of failures due to conflict)
In 2010, there were 462 active US venture capital firms, defined as investing at least $5 million in companies. This compares with 1,022 such firms at the height of the tech bubble in 2000. If you define the universe of US venture capital firms as those raising money in any of the last 8 years, the 2010 count was 791. These firms managed $176.7 billion in committed capital.” National Venture Capital Association Statistics: In 2010, venture capitalists invested approximately $22 billion into nearly 2,749 companies. Of these, 1,001 companies received funding for the first time. (National Venture Capital Association 2012)
(The number of Angel investor backed startup companies in the US is difficult to estimate. Between 10,000 and 15,000 angels are believed to belong to angel groups in the U.S. The Center for Venture Research estimates that U.S. angel investors invested $19 billion in 55,000 deals (about 35,000 small businesses) in 2008.) Many of the investments were in startup or very early-stage companies. The best available estimates are that about 225,000 people have made an angel investment in the last two years (including accredited and non-accredited investors) Dec 2012. In the USA there are approx.. 35,000 new companies that start in business every year in which Angel Investors have an interest (The Center for Venture Research 2008).
The Angel Capital Education Foundation has 300 American groups in its database. The average ACA member angel group had 42 member angels and invested a total of $1.94 million in 7.3 deals per year in 2007. Total of 2,190 investment deals in 2007. Between 10,000 and 15,000 angels are believed to belong to angel groups in the U.S.