Everyone knows that starting companies–and investing in startups–is a risky way to earn a living.
But few people appreciate just how risky it is.
Thanks to a recent tweet from Paul Graham, the founder of “startup school” Y Combinator, we now have a better idea.
Graham says that 37 of the 511 companies that have gone through the Y Combinator program over the past 5 years have either sold for, or are now worth, more than $40 million.
Most entrepreneurs would probably view creating a company worth more than $40 million as a success (unless the company raised more capital than that). And, on its face, the “37 companies” number seems relatively impressive.
In fact, however, the number tells a scary and depressing story.
This number suggests that a startling 93% of the companies that get accepted by Y Combinator eventually fail.
A company accepted by Y Combinator, therefore, has less than a 1-in-10 chance of success.
More alarmingly, the companies accepted by Y Combinator are only a tiny fraction of the companies that apply.
If we use the 5% rate, we can estimate that Y Combinator has received about 10,000 applications for the ~500 companies it has chosen over the years.
Assuming Y Combinator has even a modest ability to pick winners, therefore, the odds that a company applying to Y Combinator will be a success are significantly lower than the odds of success of the companies accepted into the program.
If only 37 of the companies that have applied to Y Combinator over the years have succeeded, this is a staggeringly low 0.4% success rate.
Put differently, only 1 in every 200 companies that applies to Y Combinator will succeed.
The reality is that Y Combinator probably misses a few winners, so the actual odds are probably slightly higher.
But in case any entrepreneur or angel investor is deluding themselves into thinking that startups are an easy way to cash in, they might want to think again.