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Three Out Of Four Startups Fail: Report

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STARTUP FAIL
Pets.com's sock puppet: The San Francisco-based pet products company, which shuttered in 2000, is one of the most iconic startup failures of the dot-com era. (Photo by Chris Hondros/Newsmakers) | Getty Images

Failure is a big part of the startup game. When investors bet on fledgling companies, most of them know that the risk is high -- but few knew it was this high.

Shikhar Ghosh, a Harvard Business School lecturer, has released research that shows venture-backed startups fail at a much higher rate than previously thought, The Wall Street Journal reports.

About three out of four new firms that take venture capital fail to deliver projected returns, Ghosh told the WSJ. That stat, the Journal notes, dwarfs previous estimates by the National Venture Capital Association that pegged the startup failure rate at 25 to 30 percent.

The notion that startup investments frequently fail to deliver returns has prompted some to say the venture-capital model is broken.

Dave McClure, a former PayPal executive and founder of the Silicon Valley accelerator 500 Startups, lashed out at VCs last month during a tech conference in Canada. “The last 10 to 20 years you’d think that it has been all about VCs making money, because that’s all we hear about,” said McClure. “But it’s really about VCs failing and failing to return capital and being fucking idiots. VCs are stupid. They are absolutely stupid.”

Overall, the VC industry hasn't produced its promised returns for more than ten years, according to a recent report by the Kauffman Foundation.

“Over the past decade, public stock markets have outperformed the average venture capital fund,” Kauffman said. “For 15 years, VC funds have failed to return to investors the significant amounts of cash invested, despite high-profile successes, including Google, Groupon and LinkedIn.”

But it is those homeruns that keep VCs in the game. And while they are few and far between, successful startups on average sell for $196.8 million and give shareholders a 676 percent return.

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