Venture-backed startups famously aim for “exit.” On the path to building great companies, entrepreneurs raise rounds of venture financing and assemble a team to develop an innovative product or service that can grow fast. Success for startups is often framed as reaching a liquidity event, or exit, that provides financial returns and rewards to the investors, founders, and employees. There are two main ways to do this: sell the company or go public. Each of the two paths to a successful exit—going public or an M&A sale—have been the subject of significant scholarly examination and public debate in recent years.

Most venture-backed startups, however, never reach either of these paths, or if they do it is in a state of distress. Approximately 75% of venture-backed startups fail – the number is difficult to measure, however, and by some estimates it is far greater. In general, a startup can be said to fail when it ultimately falls short of reaching an exit at a valuation that would provide a return to all equity holders. This can occur for a wide variety of reasons—such as running out of cash, problems in the team, shortcomings with product development or business model, getting outcompeted, a lack of market need, or changed circumstances. The participants may not expressly call this a “failure”—and indeed they may work mightily to find a “soft landing” that allows them to characterize it otherwise—but it is distinctly an end that is not a going-public transaction or M&A sale that results in returns to all equity holders.

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