The Myth of Striking Gold: Unveiling the True Odds of VC Success

By George S Pullen, Chief Economist, MilkyWayEconomy

When we talk about venture capital (VC), it’s often portrayed as the lifeblood of innovation, funding the next great unicorn that will transform industries, cultures, and economies. But the reality? Venture capital is more akin to rolling dice at a high-stakes table than conducting a calculated business investment. The question isn’t just whether you’ll win or lose—it’s understanding just how unfavorable the odds are from the start.

The Overwhelming Odds: Chasing VC Dreams

Every year, the allure of venture capital drives thousands of entrepreneurs to pitch decks and boardrooms in search of funding to fuel their startups’ growth. In the United States alone, approximately 100,000 new startups emerge annually. However, only a small fraction—less than 1%—will receive venture capital funding. To put this into perspective, of the 100,000 startups founded each year, just over 1,000 will secure a venture capital investment.

The competition becomes even starker when you consider that VCs actively evaluate and reject nearly 99% of the funding pitches they receive. For every startup that succeeds in obtaining a coveted spot in a VC’s portfolio, thousands of others are left to bootstrap or seek alternative funding routes, such as angel investors, grants, or small business loans. And even for the select few that do secure VC backing, the battle is far from over. A successful funding round doesn’t guarantee a startup’s survival or success. On the contrary, it often comes with the pressure to deliver rapid growth and return on investment, which can push startups to scale prematurely, leaving them vulnerable to failure when market conditions shift or operational challenges arise.

High-Risk, High-Reward, or Just High-Risk?

Let’s dismantle the myth of guaranteed returns. VCs pour billions into startups annually, but less than 0.1% of all startups actually go public through an Initial Public Offering (IPO). Yes, you read that right. For every 1,000 startups that receive venture capital, perhaps one, if any, will navigate the perilous journey to IPO status.

But let’s zoom in further. Even within venture-backed companies, where capital and support ostensibly increase the likelihood of success, the numbers are sobering. According to a Harvard Business School study, approximately 75% of all venture-backed startups fail. That means three out of four companies will fold, leaving investors with nothing but a lesson in humility and the hope that their remaining investments might still bear fruit.

The Illusion of Unicorns: Betting on Outliers

Many VCs tout their ability to identify “unicorns”—startups valued at over $1 billion. However, unicorns are statistical anomalies, not benchmarks. Out of the 1,100 unicorns worldwide as of 2024, fewer than 200 have gone public. Most exist in a liminal state of immense valuation but lack a clear path to liquidity. When they do IPO, their inflated private valuations often clash with public market realities, leading to disappointing performance.

Take WeWork’s ill-fated attempt to go public in 2019. Initially valued at $47 billion in private markets, WeWork’s IPO debacle highlighted the chasm between private hype and public scrutiny. The company’s valuation plummeted, forcing investors to grapple with the fact that even the most promising “unicorn” can transform into a cautionary tale.

IPOs: The Narrow Gate to Liquidity

The journey from startup to IPO is not a linear path but rather a narrowing funnel where most contenders are weeded out. Even for successful, revenue-generating startups, the path to public markets is fraught with barriers—regulatory hurdles, market volatility, and evolving investor expectations.

Statistically, less than 2% of venture-backed startups reach the liquidity stage, whether through an IPO or acquisition. Of that 2%, fewer than half go public. This leaves VCs reliant on acquisitions, which may or may not yield favorable returns. This means that, even under optimal conditions, your odds of investing in a venture-backed startup and seeing it go public are around 1 in 50. 1 in 43M for astrapreneur startups.

The Startup Journey: From Seed to IPO – Real-World Examples

Understanding the journey from seed funding to IPO requires a grasp of the typical stages a startup navigates, and how long it can take to traverse them. Let’s examine three different companies: WeWork, Snapchat, and NVIDIA, each illustrating distinct paths and timelines to an IPO.

WeWork:

• Founded: 2010
• Seed Stage: Received initial funding from a small group of investors in 2010, followed by Series A in 2012 from Benchmark Capital.
• Growth Stage: WeWork attracted significant capital through multiple funding rounds, amassing over $10 billion from SoftBank and other investors by 2019. It was labeled a unicorn early in its journey, and by 2018 its private valuation had peaked at $47 billion.
• Attempted IPO: WeWork filed for an IPO in 2019 but faced intense scrutiny over its financials, business model, and governance issues. The IPO was ultimately withdrawn, and WeWork’s valuation plummeted to around $8 billion. It was only through restructuring and new leadership that WeWork eventually went public via a Special Purpose Acquisition Company (SPAC) in October 2021—11 years after its founding.

Snapchat (Snap Inc.):

• Founded: 2011
• Seed Stage: Secured seed funding in 2012 from Lightspeed Venture Partners, followed by a Series A in 2013.
• Growth Stage: Snap Inc. continued to attract large amounts of capital through subsequent funding rounds, and by 2015 it was valued at $16 billion.
• IPO: Snap filed for its IPO in 2017, just six years after its founding. The IPO valued the company at $24 billion, and despite early challenges, Snap’s stock has experienced significant growth, reaching a market cap of over $90 billion in recent years.

NVIDIA:

• Founded: 1993
• Seed Stage: Initial funding came from Sequoia Capital in 1994, followed by a Series A in 1995.
• Growth Stage: NVIDIA expanded through the 1990s, securing funding as it established itself as a leader in graphics processing units (GPUs). By the time it was ready to go public, it had raised only a modest $20 million compared to today’s funding giants.
• IPO: NVIDIA went public in 1999, six years after its founding, at a valuation of $626 million. Since then, it has grown exponentially, achieving a market cap of over $1 trillion in 2023, making it one of the most successful tech IPOs in history.

These timelines reveal that the path to an IPO can vary drastically—anywhere from six to over ten years, depending on the company’s industry, funding strategy, and the strength of its business model. Yet, the journey from seed to public markets remains treacherous, and many companies like WeWork find themselves falling short of their private market hype.

The True Cost of Pressed Deals

Pressed startups—those burdened with inflated valuations, rushed timelines, or overextended capital commitments—face an even steeper climb. These companies, often pushed to scale prematurely, burn through cash at unsustainable rates. VCs frequently double down, leading to “good money chasing bad” scenarios.

The numbers don’t lie: pressed startups are 50% more likely to either fail or undergo a distressed sale compared to their more conservatively managed peers. When pressed startups do succeed in going public, their performance is erratic, with over 60% underperforming in the first year post-IPO.

The Bottom Line: Playing Against the House

Ultimately, venture capital investing is not just risky—it’s exponentially risky. Your odds of picking a successful startup that goes public are slim to none, and your odds of picking a pressed startup that bucks the trend? Slimmer still. Yet, like gamblers at a casino, VCs remain drawn to the table, driven by the allure of that one big win.

For most, the real money isn’t made by investing in 100 startups and hoping for a unicorn. It’s made by charging management fees, collecting carried interest, and leaving a trail of failed startups in the wake of promises that, for most, will never materialize.

Disclaimer: DYOR. This article is written from the perspective of George Pullen, with a focus on exposing the harsh realities of venture capital investing. Venture capital can be a rewarding asset class, but it should be approached with caution and a clear understanding of the high odds of failures.