Predicting startup survival using first years financial statements

Abstract

ABSTRACT Numerous articles demonstrate the usefulness of financial ratios in predicting the bankruptcy of companies, but in the case of new companies their usefulness is questionable. Many of the firms that are successful today made few profits when they were first created. On the other hand, structural inertia from the theory of organizational ecology and the “survival of the fitter” principle advocate that companies that are healthy in their early years will go ahead in greater proportion than those that start with many difficulties. Our empirical study used financial data from a sample of 6,167 newborn Spanish startup companies, analyzing their evolution up to eight years later. We found healthier financial indicators in the first years of startup companies that survived eight years than in those that failed, supporting the organizational ecology theory. We found statistically significant differences in profitability, productivity, liquidity, leverage, and size. The models developed showed predictive capacity, but they did not reach that of the bankruptcy models made with mature companies. The analyzed period corresponded to a period of economic crisis. The study was repeated with data from another noncrisis period to enhance the validity of the results, and obtained similar results.