Everyone knows that investing in innovative new ideas carries a degree of risk.
However, new data from Correlation Ventures shows just how risky investing in new companies can be.
The chart above shows the financial outcomes for 21,640 different financing deals between 2004 and 2013 (note that these were the total number of deals, not individual companies).
[Special thank you to Correlation Ventures and Seth Levine for making this data public, and for Alex Osterwalder for the post which brought this to my attention.]
The majority of these companies will have been startups, and therefore a useful analogy for the success rate of companies focused on building innovative new solutions.
What the data shows us is just how low the success rate for startups is, even if they have an offering deemed good enough for Venture Capital investment.
- 65% of investments failed to make a return on investment
- 25% of investments made a small return on their investment of 1-5x
- Only 10% of investments made a return of more than 5x
- Only 4% of investments made a return of 10x which could be deemed very successful (some people call these “Home Runs”)
This aligns quite closely with analysis done by Doblin on the success rate of innovation initiatives within companies, where they found that only about 4% of innovation projects end up delivering a return on investment.
That is a success rate of 1 in 25, and even lower than the success rates outlined above.
And this scares a lot of managers.
But what it also shows is the need for a portfolio approach to investing in new ideas.
If you want to make sure that you make a return on your innovation investment, it is important to accept that not all initiatives will succeed, and therefore have a mix of some core / incremental innovation along with the more transformational projects as well.
You need to be willing to invest in a range of projects, accepting that some will fail, but providing the support needed to make the good ones likely to be even more successful.