New research by IVC Research Center and REVERSEXIT examined, for the first time, success rates among Israeli start-ups. The report found that only 4% of Israeli start-ups succeed, and that only four out of 500 are successful in growing independently.
The goal of the research was to learn the key factors that lead to success in order to provide entrepreneurs with tools to better predict the likelihood of success for their venture. REVERSEXIT will soon be launching a new international platform integrating analytics tools and advanced search engines, specifically geared at improving startup success rates, by connecting startups early on with organizations that can help them.
More than 10,000 Israeli high-tech companies founded between 1999 and 2014 were examined. Parameters analyzed included capital raising, length of activity, company size, technology, ownership, investor identity and more. In addition, the researchers attempted to define, with the help of various industry players, the factors that constitute a successful startup.
IVC Research Center CEO Koby Simana said, "As we attempted to define what could be termed a success for a high-tech company, we found that there were different perspectives on how success is defined. According to most entrepreneurs, success is the realization of a business idea, a dream or technological innovation and its concrete implementation into a real business. Among younger entrepreneurs, we also found the wish to 'hit it big time' that is, to build a startup and sell it for a significant profit, although this view did not represent the majority. For investors, a real positive return on investment determined a success, while for the government and state, success was measured in terms of exports, job creation and tax payments, such as income tax and company tax."
The researchers determined, in line with the findings, three indicators of success: annual sales, number of employees and an exit ratio that reflects a positive return on investment from the sale of a company’s shares. They found that more than 46% of the companies established in the last 16 years have been closed and are no longer active, while the remaining companies are still active in various stages of development. Among the companies that are no longer active, 662 (14%) were acquired and only half were acquired for a positive exit ratio, i.e. for an amount larger than the total capital invested in the company between its establishment and the exit - which can be considered successful.
Of more than 5,400 companies active today, the research found, only 139 companies can be defined as successful (about 2.5%). The indicators for successful active companies consist of annual revenues of $100 million or 100-plus employees. The application of more flexible criteria to include companies with valuations of $50 million or more exhibiting sales growth, or companies that no longer require capital raising from shareholders and are sustained by sales, expands the number of successful companies to below 350. In other words, even with a lower threshold, only six percent of currently active startups can be deemed successful.
All other companies active today, more than 5,100, are what the report refers to as "running" companies. REVERSEXIT founder and CEO Yehuda Regev said, "Most start-up companies manage to go through the development stage and the selection of technology. Some push through to the product development stage. Most, however, fail when it comes to market reach. This type of failure is precisely the reason why most companies - failed and running - do not manage to escape the "valley of death" - the ongoing burning of cash and the inability to meet the needs of consumers and customer - while moving from the development phase to generating positive cash flow."
Among “running” companies are thousands of seed companies, most of which were established in the last three years. But also found are companies running for 16 years, surviving mainly due to investor backing. In total, there are 1,184 “running” companies established between 1999 and 2007, that is, companies eight years of age or older, that have yet to succeed.
Further analysis of today's active companies by IVC-REVERSEXIT found that the majority is private and only 102 are public. Among public companies only 19 can be termed successful according to the research criteria. The rest are traded at low valuations, employ a relatively small number of employees or generate sales volumes below the threshold of success. A significant portion of these companies, particularly life science companies, are listed in secondary markets such as OTCQB or stock exchanges with low trading volume.
The researchers found a total of 480 companies established since 1999 that are considered successful according to the research criteria. These 480 companies were analyzed to verify the factors of success. Among other findings, they discovered that the vast majority of successful companies (about 83%) raised an average of $22.5 million. 81 companies - about 17% of the successful companies - did not receive any external investment at all, and were entirely bootstrapped. Among the companies that have been venture-backed, nearly 60% were funded by venture capital funds, and about 30% by corporate investors.
Regev said, "REVERSEXIT makes risk-free connections between young companies starting out and corporations, helping them form strategic partnerships which promote the startup’s market reach. We do this using our patent pending algorithm and our innovative model, since we believe that connecting to a corporation early on can propel a startup’s popularity and instantly ensure high demand for its services. Investors, mentors and suppliers are also be able, via REVERSEXIT, to connect to startups in equity-based transactions, where no cash is burned."
Corporations play a significant role in the success of startups, not only as investors, strategic partners and customers, but also as potential acquirers. Among successful companies, 71% were acquired by corporations, yielding positive exit ratios and value returns to shareholders (an average ratio of over 18 times on capital invested).
"Speaking about exits is all well and good, but our data suggest that (a) only a small percentage of startups reach an exit, and (b) an exit does not necessarily guarantee success," said IVC’s Simana. "Not all acquisitions resulted in positive returns to investors, and we’ve found companies that were sold after running for quite a long while and where millions of dollars in investments turned almost worthless. Companies have to think about value creation from day one. Fortunately it seems that the market and entrepreneurs have been implementing this rule in recent years, which accounts for the fact we found startups that were successful within less than three years of establishment."
Among the companies that were successfully sold, the average age was 5.3 years. Venture capital funding added another six months of activity, compared to companies that received no financing at all. Successful companies that are still active have been operating for slightly over 10 years, on average, whereas failed companies shut down on average within 3.2 years of establishment."
Published by Globes [online], Israel business news - www.globes-online.com - on January 28, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015