When we produce our annual Atlantic Canada Startup Data report, there are two sets of statistics that people usually find interesting because they're stark reminders of the perils of entrepreneurship: zombies and failures.
We found that 66 Atlantic Canadian startups failed in 2018, and we estimated there are the same number of zombies.
To put that in perspective, we were following 486 startups at the end of 2017, and in the coming year more than one-quarter of them were either out of business or raising questions about their prospects. And we think we may have been conservative on the number of zombies.
As the above chart shows, the number of startup failures in the past few years has risen, with 66 recorded in each of the last two years.
Most interpret this as good news. In fact, when we delivered presentations on our data report in 2018, no audience member expressed any shock that the number of failures is rising. When these companies close down, they free up human talent for other companies, and ease the demand for financial resources from funders and support organizations. Failures allow the stronger companies better access to scarce resources.
One third of failures – 22 companies – had launched in 2017, so they never really got off the ground. Many of these were university projects with which the founders simply chose not to continue.
We counted six failed companies in 2018 that had raised equity capital. The most notable failure was AIOtv, a Halifax- and Denver-based IT company that had employed 20 people in 2016. The company received $1 million in funding from Innovacorp, and a year later sold 44 percent of the company to China’s UTStarcom Holdings Corp. for $8 million.
We label a startup a zombie company if it meets three criteria: the company has to be at least two years old, hasn’t made a public announcement in two years and hasn’t raised capital in at least three years. Sure, there are some companies silently forging ahead, but generally prolonged silence is a sign of trouble.
We found there were 66 zombies at the end of 2018. It’s a noticeable drop of about one-quarter from the previous year, but it would be imprudent to conclude that things are improving. Many of the zombies from 2017 made their way into our failure list in 2018.
People often ask what factors create zombies. We can’t establish cause and effect, but we can identify some concentrations and patterns in how companies develop.
|Newfoundland and Labrador||3||4%|
|Prince Edward Island||8||17%|
Source: Entrevestor Databank. (*Concentration is the number of zombies expressed as a percentage of the total startups in the province in question.)
As a side exercise, we carried out another test to indicate the number of zombie companies. We took all 326 companies that were more than two years old and researched how many had grown to more than two employees. The rationale was that if a company is truly growing, it will be hiring people, and that increase will be visible. We found 97 companies had zero-to-two employees – 30 percent of the total. We will stick with our headline figure of 66 zombies, but the examination of staffing again shows we may be underestimating the prevalence of the undead.