That is rather high for first year, the first year business failure rate is typically about 20%. It would be interesting to find out the first year failure rate during the dot com boom.
If I am understanding this correctly, according to the research cited in this article, the
5 year survival rate for dot-com businesses was around 50%. It's hard to believe that almost as many ICOs failed in one year as dot-com businesses did in five years. There are some very eerie similarities in this article to what is going on now in the cryptocurrency industry. The article if fairly long, but I did find "the herd instinct" interestingly familiar.
Lessons of the Last Bubble -
https://www.strategy-business.com/article/07102?_ref=http://www.businesspundit.com/lessons-from-the-dotcom-bubble/&gko=cd580-1876-23502176The Herd InstinctWhy did so many companies try to be the first mover and pursue a “get big fast” strategy despite the questionable economic and strategic logic of that approach? Part of the blame clearly falls at the feet of the venture capitalists. Venture capitalists play a critical role in the economy by funding business ideas early in the life cycle when the risk of failure is high. By having a portfolio of such investments, venture-capital funds offer extraordinary returns even when only a small fraction of the businesses succeed. In normal times, venture-capital firms view thousands of ideas from passionate entrepreneurs, but generally fund just a handful of businesses each year. Furthermore, they parcel out the money gradually as the companies prove the viability of their business models.
But during the heady days of the dot-com era, the venture capitalists found themselves with a surfeit of money as more and more investors wanted a piece of the action. Although far more projects were chasing those funds than had been the case in past years, the venture-capital firms did not necessarily have the resources to screen all of those ideas with consistent rigor. Since investors couldn’t maintain their formerly high levels of fundamental due diligence at the faster pace of the bubble years, they began to make investment decisions by looking to the decisions of other venture investors. As with the buffalo on the prairie, a few leading examples charging off with abandon can create a stampede. And when no one knows with confidence where to go, the safest path is to follow the herd.
Sociologists have a fancy name for this herd instinct: mimetic isomorphism. They have documented its prevalence in industries as varied as trucking and banking. That research has also demonstrated the rationality of copying others. Although copying rarely produces a breakthrough outcome, it does keep an organization from being left behind. Only a brave buffalo goes against the stampede. And unless that buffalo is extremely agile, it may well be crushed by the herd.
Unfortunately, once the process of mimetic isomorphism gets started, it is hard to stop. The only way to get funding during the dot-com heyday was to identify a new market and promise exponential growth (à la Metcalfe’s Law). That exponential growth required huge funds that siphoned money away from potential late starters who could learn from the initial failures. The “get big fast” strategy produced more losses as companies focused on market share rather than profits. But the venture capitalists — and then the capital markets — agreed to fund the massive investments and simultaneous losses. The only way to avoid the day of reckoning on profits was to continue promising more growth and seeking more money to fund it. Even before it went public, Webvan scored a $1 billion market capitalization by promising exponential growth from a mere $4 million in revenues — less than one-fourth of the annual sales of a single grocery store.
Although following the herd may appear rational in periods of high uncertainty whenever the herd dynamic is evident, there is reason to be wary that an opportunity has peaked. Jeffrey Immelt, CEO of GE, recently warned an auditorium of MBA students at the Darden Graduate School of Business to avoid the herd instinct; he cited his own experience upon exiting Harvard in 1982. He noted that he and only one other classmate joined the staid General Electric Company that year, just months after Jack Welch took the helm and launched what would become a phenomenal 20-year period of growth. What was the biggest employer of Harvard MBAs in 1982? A “hot” technology company called Atari; it took on 17 graduates. (By 2002, of course, when Welch retired, Atari was long dissolved, its brand name sold to Hasbro Interactive.)
The biggest risk of the herd instinct comes when the stampede turns and heads in the opposite direction with equal abandon. When the dot-com craze reversed itself, millions of investors lost a large proportion of their retirement accounts. And more than 100,000 dot-com employees lost their jobs in the 10 months from October 2000 to July 2001. When bubbles pop, many people get hurt.
To avoid the bubble, we recommend lots of little experiments that send the herd in many different directions. Avoiding the “get big fast” strategy and the herd instinct allows for a more thorough investigation of the terrain. Many members of the herd will fall upon barren terrain and die, but in the long run, careful nurturing of the fruitful routes will produce a greater herd than overgrazing of the fertile patches discovered by the lucky few.
