Startup Graduation Rates: How Many Make It From One Round to Another, and What Does It Take?
Synthesizing Insights From the Data
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Less Than 1 in a 100 Startups Exit
The European tech ecosystem is thriving, with around 15,200 new tech startups founded each year, surpassing the 13,700 founded annually in the US. Yet, despite this impressive number, the reality is stark: only a small percentage of these companies secure funding, and even fewer make it through the various venture stages to reach acquisition or IPO. In fact, roughly 0.595% of all startups manage to achieve funding beyond a Series D or an exit, while the majority either stagnate or fail.
What drives the difference in outcomes? Understanding the startup journeyāfrom initial funding rounds to exitāis critical for founders, investors, and stakeholders alike. Each stage comes with its own set of hurdles, and knowing the promotors that accelerate growth can make all the difference. How do startups move through this funnel, and what are they trying to prove at each stage of their evolution?
In this episode, weāll dive into the latest research, examine graduation data, and analyze key findings on startup performance. Our goal is to help you gain a clear picture of the factors that shape your trajectory, enabling you to better assess your position, and strategize for success.
A Scientific Approach to Startup Graduation Rates
Startups transition from one financing round to another based on a complex interplay of factors, including the maturity of the business, the effectiveness of their business model, the social capital of the founders, and the strategic decisions made by the management and shareholders.
Understanding these dynamics is crucial for startups aiming to secure subsequent funding rounds. Initially, startups often begin with angel or pre-seed funding, which is essential for developing a prototype or proof of concept. This early stage is characterized by a learning phase where the startup refines its product and business model (Peixoto et al., 2023).Ā
As the startup progresses to the seed stage, it typically has a prototype that it can attract further investment, often reaching $2 million to enhance product readiness for the market (Peixoto et al., 2023).
The transition from seed funding to Series A is particularly critical, as this round is often seen as a marker of success and gate to product-market fit, distinguishing startups that can secure significant VC investment from those that cannot (Spiegel et al., 2015).Ā
The role of social capital cannot be overstated in this context. Research indicates that social networks are particularly influential during the initial funding rounds, as VCs have limited information about the startup's potential success (Zhang et al., 2016). Founders with strong social networks can leverage these connections to gain access to funding opportunities and enhance their credibility in the eyes of potential investors.Ā
Furthermore, the reputation of the VCs involved can significantly impact the startup's ability to attract subsequent rounds of funding. Signalling is real and startups that switch to more reputable VCs often see larger capital infusions, although they may face trade-offs in terms of investment size and valuation (Cumming & Dai, 2013).Ā
The amount raised in earlier rounds, along with the quality of the team and their human capital, plays a pivotal role in shaping future funding prospects (Shetty & Sundaram, 2019). Moreover, the ability to effectively communicate their value proposition through social media has been shown to enhance a startup's likelihood of closing funding rounds, as it broadens their reach to potential investors (Jin et al., 2017).Ā
The evolution of VC strategies also affects how startups progress through funding rounds. As the market landscape changes, VCs adapt their investment strategies, often influenced by technological advancements and shifts in consumer demand (Ewens et al., 2015). Early-stage investments seem to be least affected by changing investment trends and market conditions according to Dealroom (2024).
Startups that align their business models with these evolving strategies are better positioned to secure further funding. Additionally, the presence of VC clusters can enhance a startup's chances of successful exits through M&A, further incentivizing VCs to invest in promising startups (Ahluwalia & Kassicieh, 2021).