Young, fast growing companies have a higher risk of failure compared with more mature entities. In order to discount this risk, survival rates are multiplied by the forecasted cash flows, taking the valuation cash flows’ expected value into consideration.

Sources and further calculations

Survival rates are computed as the percentage ratio between companies founded in a given year of the past and survived 1, 2, etc. years and all companies founded in the same past year.

Public institutions and researchers all over the world periodically survey national companies to estimate country-level survival rates. Equidam’s sources for the first three years of survival rates are the European Office of Statistics (http://ec.europa.eu/eurostat) for EU countries, the Bureau of Labor Statistics (https://www.bls.gov/) for the US, and many academic articles and institutional reports for other countries.

In order to compute the rest of the survival curve, a function is fit on the first three years. Survival rates are then computed up to 10 years in the future. After that, for sake of simplicity, all companies are assumed to survive, so all further  survival rates are constant, and equal to the 10th.

Example

As of 2018, the most recent recorded survival rates of Italian companies are:

  • 76.10% (76.10% of companies founded in 2018 are expected to survive until the end 2019)
  • 62.22% (62.22% of companies founded in 2018 are expected to survive until the end 2020)
  • 52.57% (52.57% of companies founded in 2018 are expected to survive until the end 2021)

According to the curve fitting with those three data points, the following years’ survival rates are:

  • 46.85%
  • 42.10%     
  • 38.23%
  • 34.95%
  • 32.11%
  • 29.60%
  • 27.36%
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