How Much Can You Lose on a Failed Startup Investment?

When startups fail, their investors often lose money. This is fairly obvious. But how much an investor loses on a failed startup may be less obvious. 

Similar to our research into unicorn deal returns, AngelList is uniquely qualified to uncover this information thanks to our large dataset of early-stage venture investments.

To perform our analysis of money-losing investments, we looked at investments on AngelList that have been live for 1+ years with a listed gross multiple of less than 0.99x. This left us with 1,115 money-losing investments out of a qualifying set of 9,342 investments. We then examined the gross multiple of these investments, which excludes fees charged to investors.

Here’s what we found.

Gross Multiple on Failed Venture Deals

As the chart above illustrates, when a startup investment loses money, its gross multiple trends towards 0x, meaning the investor loses all of their money. 100% loss was the median outcome for a money-losing deal. The average return on these investments was -81% (denoted above by the black vertical line). In short, investors are unlikely to see any of their principal returned when a startup investment goes south.

Loss Dynamics by Round

Our research into unicorn returns found that winning early-stage deals generate higher return multiples than winning later-stage deals because they tend to follow a more extreme power law distribution. 

The inverse also happens to be true—losses from money-losing early-stage deals are more extreme than losses from money-losing later-stage deals.

The average loss from a losing seed-stage investment is 5% worse than the average loss from a Series A or B investment and 24% worse than the average loss from a growth-stage investment.

While losses are more pronounced at seed, it’s evident that investors will lose a vast majority of their principal investment in a money-losing startup regardless if they invest at early-stage (generally considered more risky) or later-stage (considered more de-risked).

This would suggest the distribution for money-losing deals isn’t as extreme as it is for successful deals. The degree to which your losers lose at seed vs. Series C is more similar than the degree to which your winners win at seed vs. Series C (that is to say, the losses are extreme across the board).

Note that it’s still less common for later-stage deals to be money-losing. In our dataset, a vast majority of the money-losing deals occurred at seed. But if you’re unfortunate enough to invest in a later-stage deal that loses money, your losses will only be marginally less severe than that of your earlier-stage co-investors.

Finding the Diamond in the Rough

We now know that when startups fail, investors will likely lose most, if not all, of their principal. This holds true regardless of whether they invested at seed or later-stage. 

Despite this fact, top-quartile venture capital returns have outperformed the S&P 500 over the last 20 years. This performance is driven by the outsized successes in the venture capital market. Many deals fail and those investors lose their entire principal, but the gains on winning deals more than make up for those losses.

Therefore, assuming a hypothetical investor is broadly indexing into every credible deal (a strategy supported by research), they may not be overly concerned about money-losing investments because of these power law dynamics. They expect most of their investments to go to zero, because it only takes one winning investment to potentially 100x their return (there are also tax benefits for investors to counter loss aversion). 

In other words, your losses are limited to 1x your money when investing in a startup, but your upside limit is 100x or more (just ask early investors in Uber, Amazon, and Facebook). 

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Footnotes

• Investments have a listed gross multiple of less than 0.99x to exclude phantom micro-losses from truncated decimals in recorded share prices.
• Investments must have been priced and raised in USD (to avoid any issues with exchange rates).