DEAR ENTREPRENEURS: Here's How Bad Your Odds Of Success Are

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. (Not all companies that sell for less than $40 million are "failures," obviously. Assuming a company hasn't raised much capital, a sale between $5 million and $40 million could be considered a success. But a high percentage of Y Combinator companies likely end up being worth zero. And for companies that are hand-picked by very smart investors, the 93%-below-$40 million rate is still surprisingly low). A company accepted by Y Combinator, therefore, has less than a 1-in-10 chance of being a big success.

 More alarmingly, the companies accepted by Y Combinator are only a tiny fraction of the companies that apply. Some have estimated that Y Combinator's acceptance rate is 3-5% . 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 one 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. UPDATE: Paul Graham points out that it takes time for a company's value to grow, so including Y Combinator graduates from this year and last year is unfair. If we use, say, 300 companies instead of 511, the odds of success improve slightly. 37 success stories out of 300 graduates produces "success" odds of just better than 1 in 10.