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Study Examines Success Rate of Venture-Backed Companies

As we have discussed in previous posts, North Carolina is considered one of the best states for businesses in the country. As new research has revealed the difficulty most start-up companies face to make their business successful, obtaining a knowledgeable business law attorney to help establish the business is a good first step.

The study was conducted by a senior lecturer at Harvard Business School. The results indicated that about 75 percent of all "venture-backed firms" in the country are unable to pay back their investors. The researchers reviewed information from over 2,000 businesses who received a minimum of $1 million in venture capital from 2004 through 2010.

The researchers point out, however, that determining whether a start-up business has been successful or not can be defined in different ways. For instance, some start-ups cease operations when they must liquidate all of their assets, meaning the investors lose everything they put into the company. According to the research, only around 30 to 40 percent of start-ups are considered to have failed under this definition. If, instead, the researchers considered failure to be not attaining the anticipated return on the investment the companies received, a much larger amount - 95 percent - are not considered successful.

Typically, companies with venture capital have a better success rate during the first four years of operation, though, as they are more likely to have the money to continue than nonventure-backed businesses. In addition, venture capitalists generally understand the risks involved and are often willing to stick with an entrepreneur, even after an unsuccessful attempt. According to one veteran venture capitalist, "The truth is that if you don't have a lot of failures, then you're just not doing it right, because that means that you're not investing in risky ventures."

Source: The Wall Street Journal, "The Venture Capital Secret: 3 Out of 4 Start-Ups Fail," Deborah Gage, September 19, 2012.

For more information, please visit our Fayetteville business transactions page.

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