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Evaluating a Startup Venture

By Michael A. Cusumano

Communications of the ACM, Vol. 56 No. 10, Pages 26-29
10.1145/2505337

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Startups are an engine of economic renewal and change around the world (see "Dealing with the Venture Capital Crisis," Communications, Oct. 2009). But successful startups are rare, and startups that go public and yield strong financials like Facebook are even more extraordinary (see "Reflecting on the Facebook IPO," Communications, October 2012). For example, living MIT alumni created 26,000 active firms with 3.3 million employees and annual revenues of nearly $2 trillion as of 2006. Five to seven years after their founding, however, only 30% of MIT startups were successful (approximately 60,000 failed).5,6 The National Venture Capital Association says about 75% of startups succeed, but a recent Harvard Business School study found this true of only about 25%. Stricter definitions of return on capital suggest only 5% of startups succeed and merely 1% go public.2

It should be possible for potential investors as well as would-be entrepreneurs to evaluate startup ventures more systematically. This column attempts to help them do this with a short checklist of key elements to look for. It is based on many years of working with startups and a list earlier published in The Business of Software (2004), with some additional reflections and examples.

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