Startup Failure Rates — The REAL Numbers
I’m writing today’s blog in the hopes of getting accurate information on new business failure rates out into cyberspace in a way that the search engines will find it quickly. There is a huge amount of misinformation on the Web about new business failure rates that gets cited and reproduced all over the place and that’s a problem for a host of reasons.
Below is Figure 6.2 (p.99) from my book Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. The data come from a special tabulation by the Bureau of the Census produced for the Office of Advocacy of the U.S. Small Business Administration.
While these data look at the 1992 cohort of new single-establishment businesses, the failure rate percentages are almost identical for all the cohorts that researchers have looked at. So, these are pretty much the one through ten year survival rates of new firms.
Proportion of New Businesses Founded in 1992 Still Alive By Year.
These are the averages. There are considerable differences across industry sectors in business failure rates (see Figure 7.1 on page 113 of Illusions of Entrepreneurship), which is pretty interesting and important. But I’ll have to leave a discussion of what those are and why they exist for another blog post.
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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.
April 28th, 2008 at 8:25 am
Hi Scott,
Very interesting. I have often read the statistic that 90% of firms are out of business by year 10. Amazingly, in Internet mythology that sometimes that gets shortened to year 5 — that 90% are out of business at the end of five years!!! Which would be incredibly depressing ….
But from these figures, 29% are still in business at the end of year 10 — is that right? And the biggest drop comes in the first 5 years, when half of startups go belly up. Still shows the odds are against startups staying in business, but at least the real numbers you cite are not quite so dismal.
Anita
April 28th, 2008 at 8:57 am
[…] Startup Failure Rates — The REAL Numbers | Small Business Trends […]
April 28th, 2008 at 9:08 am
Anita,
When the word ‘failure’ is used here…does this mean simply closed shop? Businesses close shop for different reasons, are reborn under another name. People close businesses not because they failed but retired, moved on to another venture had to move to another state and chose not to sell it. It does not equate to failure…and I’m not talking about psychological use of the word.
So, my question is, does this chart simply show businesses closing after 10 years or does it break it out further? Also, as you say, it is different across professions and this is an important qualifier.
At least it busts the myth that ‘more than 1/2 of all businesses fail by year two.’
April 28th, 2008 at 9:17 am
The most amazing number to me is year 1 - a full quarter of small businesses don’t make it 12 months. That’s truly mind-numbing.
April 28th, 2008 at 10:04 am
Friends of mine who are entrepreneurs said that the first year was always the hardest, but if you can go 3 years and still provide quality products and fresh services then you are golden
April 28th, 2008 at 10:11 am
I attended a conference last week were a representative from the U.S. SBA mentioned that the failure rate was 44% after 4 years. I also recall reading a study about two years ago where business closures (intentional) were being classified in the old stats 9/10 yrs.
April 28th, 2008 at 10:34 am
Susan,
You make a good point that “failure” here measures closure. But using a sample of the closed firms, an economist at the SBA a few years ago asked those founders whose businesses closed whether they perceived their start-up effort to be “successful” or “unsuccessful.” Approximately 70 percent of those founders whose businesses closed viewed their start-up efforts as unsuccessful.
April 28th, 2008 at 10:48 am
Thanks for that.
Here’s a link to some data published by the SBA http://www.sba.gov/advo/stats/bh_sbe03.pdf.
April 28th, 2008 at 12:34 pm
Those numbers do look very disappointing and would stop a lot of people from even trying. I would hope that those numbers don’t discourage someone from taking the leap into business. You never know, you could be among the 29% remaining after year 10.
April 28th, 2008 at 12:53 pm
While these figures are a little scary, they’re not half as bad as what some (usually those with an axe to grind or a startup service to sell you) would have us believe. It’s always good to have the real figures available - thanks.
Ian
April 28th, 2008 at 2:51 pm
I’m looking forward to reading your book. The previous data I’ve used on failure rates comes from Bizminer (http://www.bizminer.com/business-failure-business-risk.asp) it’s very thorough, if expensive.
April 28th, 2008 at 3:14 pm
Scott,
Closing business is a fact: the owner calling it a ‘failure’ is still so subjective. It would have been nice if there was more specific criteria applied. If I voluntarily close my business, all my bills are paid and I fed my family but wanted to go globally and the economy turns..would I call it a failure? Or I wanted to be able to retire at 29 would I call it a failure? See what I mean? This is an important concept for my readership so that’s why I’m belaboring the point a little bit. Statistics have always troubled me as a rule so if I’m pushing the envelope here….well, that’s what I do.
April 28th, 2008 at 5:40 pm
Another cartoonist once told me that most cartoonists will give up (fail) after 6 months.
That makes Scott’s graph look downright rosy!
April 28th, 2008 at 6:02 pm
[…] Scott Shane Professor of Entrepreneurial Studies at Case Western Reserve University, writing in Small Business Trends, refers us to his book Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, […]
April 28th, 2008 at 6:40 pm
[…] you’re thinking of going rogue and starting your own start-up, you may not want to look at this handy graph less you be […]
April 28th, 2008 at 6:56 pm
We enjoyed your graph on U.S. business closure rates; it seems to align substantially and conveniently with the commonplace theory of “thirds” and a “study” by the U.S. Small Business Association that states only 2/3 of all small business startups survive the first two years and less than half make it to four years. However, to imply the graph represents bonfied “failures” as opposed to mere “closures” or “restructuring” may not comply with the facts and may totter on the false assumption that businesses “need” to stay in business for a x number of years in order to be considered “successful” (if this is in a fact a “failure chart”) and gives rise to the great illusion that permanence is not only achievable but is the brother-in-arms to virtuosity or in this case, “success”. I think a greater study would have to do with the number of businesses that operated 5 years or less and turned a profit of x. Also, this chart by its own acclaim is exclusively representative of a “1992 cohort of new single-establishment businesses”. Given the paradigm shifts in technology and internet based businesses, although the graph may be reasonably indicative of a general trend as per 1992, it could be a bit underwhelming in validity when one, of necessity factors in the emergence and exponential paradigm shifts of the post-1992 internet/business age, with all due respect.
April 28th, 2008 at 10:35 pm
I want to know what constitutes “success” and “failure”: if the founders sell after 4 years for $6 million, knowing they’ll otherwise be eaten by a competitor, is that failure? For me, the success or failure of a job has more to do with what I learn from it, and its career-advancing value, than whether it ends by my choice or not. However, that definition of success is nearly impossible to measure.
In any case, I don’t find these numbers to be as scary as some posters. Jobs don’t last forever, losing one is not the end of the world, and, anyway, working in a large company has its own risks. Honestly, if any company could offer me a job and career path where I had a 50% chance that it would still be worth coming to work four years later, I’d take it in a heartbeat.
April 29th, 2008 at 2:23 am
Whilst these figures could be daunting, I think to many entrepreneurs they are actually a challenge that they enjoy winning against.
It would be interesting to know the facts behind the failures and successes over these years and what these trends show us apart from the usual ones that you read about. This may be in your book Scott, if so I will look for a copy
April 29th, 2008 at 2:26 am
I agree with Mike Church and his statement that “jobs don’t last forever”. I have been struggling with a small business for about two years now and we have learned a lot during this time.
April 29th, 2008 at 8:50 am
Business Failure Rates-The Shocking Truth…
Business Failure Rate statistics are some of the most widely misqouted statistics in the world. I’ve heard everything from 90% of startups fail in their first year to 20% fail in their first year. I think it’s safe to say that the actual business fai…
April 29th, 2008 at 1:57 pm
These numbers actually aren’t as bad as one would think. At what point is a business a “business”? Is it someone incorporating? I’ve known people who have started the process by getting their business legally established but bailed before getting a store front. I much prefer to see that I have a 75% chance of success in the first year than a 50% chance of failure.
April 29th, 2008 at 11:36 pm
Entrepreneurship involves risk. The statistical failure rates (whatever they are) should discourage any rational person from ever venturing beyond the limits of a steady paycheck and a predictable outcome.
Yet, as Vinod Khosla, a partner in Kleiner, Perkins said “Success only comes from those who are foolish enough to think unreasonably. Entrepreneurs need to stretch themselves beyond convention and constraint to reach something extraordinary.”
Blogger Mark Fletcher put it this way “You have to be wrong in the head to start a company But we (entrepreneurs) have all the fun.
April 30th, 2008 at 2:06 pm
I agree with Gary Schoeniger that “Entrepreneurship involves risk.” Be sure to do a great deal of industry research before you invest your time and money into a new business. Are people actually buying the products you’d like to sell? How much marketing and advertising investment do you need for your particular industry? If you’d like to start out with minimal risk, try ecommerce platforms that allow you to sell other’s items and earn a commission when you buy those items. You pay a flat fee, I know WebStore by Amazon charges about $60/month. I’d check it out.
May 2nd, 2008 at 5:13 pm
I agree it is good to have real statistics. While everything does not look rosy, it is much much better than the 90-95% after 5 years that I keep hearing quoted all over the place like it was fact.
If is also noteworthy that these rates all differ by industry, business size, geographic area, experience of the individuals starting the business, etc, etc, etc. When all of these items align themselves in an attractive manner, I would bet that the odds of failure would go way down.
I also agree that “Entrepreneurship involves risk.” But lets not forget, sitting in a job with a steady paycheck offers risk too.
May 4th, 2008 at 9:56 pm
[…] a link to a recent blog post that I think is pretty credible: Smallbiztrends.com: Startup failure rates. You will hear people say that 50% of businesses fail within 2 years - sometimes it’s […]
May 15th, 2008 at 6:53 am
[…] viel ältere Wurzeln hat und auch auf breiten, fundierten Beinen steht. Im Small Business Trends Blog bin ich z.B. auf eine sehr aussagekräftige Tabelle gestossen, die vom Bureau of the Census […]
May 28th, 2008 at 12:20 am
[…] following up my posting of a few weeks ago on new business failure rates where I said that there are considerable differences across industry sectors in business failure […]
May 30th, 2008 at 11:52 am
Great post. Very timely and inspiring in its own way to show starting your own business is tough…but not as tough as we’d been led to believe.
Thanks.
June 13th, 2008 at 1:44 pm
[…] do so many start-ups fail? After failing a few times myself and watching a boatload of others fail, I can tell you with […]
June 20th, 2008 at 3:20 pm
[…] Bureau of Census for the Office of Advocacy of the Small Business Administration. The statistics in his article(as seen in chart above) show that about 25% of new businesses fail within the first year and 36% […]
June 27th, 2008 at 3:12 pm
Thanks for this honest research that throws some light on the failure rate of both franchisees and franchisors in new and old systems.
Unfortunately, these statistics do not get wide coverage and in the franchise world, franchisors and their agents still sell franchises with the untrue hype that “the franchise is different and that franchises survive at greater rates than independent businesses.” There is still the old myth of the “95% success rate” that was thrown around for years, and while now denied by the IFA is still spread as rumor in the pre-sale hype of the franchisors.
This rumor that brings naive and inexperienced franchisees who are looking for jobs and income to sign malicious 10 and 15-year contracts with franchisors with no knowledge of the great risk they are taking is made possible because unit performance statistics in franchise systems do not have to be disclosed under the FTC rule and the FDD presented as a package before a franchise sale can be completed under the law.
Hopefully, the research and comments of Scott Shane will be found by all franchise prospects who will do Google Searches on Franchise Failure Rates and there will be a new era in franchising. Hopefully, those VETS and their families who are targeted by the Patriot Express Loan Initiative passed last year will be WARNED of the risk and the possibility of the loss of their collateral in any failure to complete the long-term contracts that they must sign in order to buy a franchise.
Additionally, there appears to be cooperation within the status quo to hide the very high rate of failure of startup franchisees from new buyers of franchises because, of course, even the failed franchisees DO stimulate the economy and feed the franchisor all of the time they are trying to make their businesses successful. And, of course, the failure of the franchisee isn’t always a failure for the franchisor if the assets are acquired in a fire sale and continue to serve the franchisor.
If some percentage of franchisors in any way beat the harsh statistics offered by Dr. Shane, is it only because they can churn on the flesh of their franchisees to reduce the statistical risk of the start-up small-business chain franchisors? Is this why the FTC Regulatory policy and the economists support franchising as a business model and subsidize the franchisors with ineffective regulation that permits franchisors to hide the risk of the franchise purchase from new prospective buyers?
June 30th, 2008 at 7:32 pm
Thanks for posting such relavent and useful info. Hopefully more entrepreneurs will read your posts before walking into the harsh realities of business blindly.
July 3rd, 2008 at 10:02 pm
Thank you for the information, there is always a lot of risk to build and manage a business. Is not only competition, but also managerial ability, capitalization, hiring, etc. Clearly there is a difference between a Business Owner and a entrepreneur. Business owners plan for all those contingencies and work on a plan to grow their business while Entrepreneurs are usually enamored with their ideas, but they don’t usually take into account what is needed to do to make it happen.
Daon from http://conxie.com the bad credit blog
July 5th, 2008 at 12:26 pm
Yes! Daon!
In the Franchise World, it is the FranchiSOR who is the entrepreneur who “brands” his particular concept and the franchisee is merely a resource of cheap labor and cheap “venture” upon which the franchisor hopes to grow the gross sales of the system. The franchisor ALWAYS gets his royalties/profits no matter what the status of the franchisee; the franchisee can be operating at a LOSS, at PROFIT, or at BREAKEVEN STATUS but must al.ways pay royalties and other fees to the franchisors for the entire term of the contract that he/she survives.
Corporations would open their own chain units if there were greater profits to be realized but franchising is a way of MAXIMIZING profits while reducing the risk and the expense of building and operating the physical units themselves because the risk is taken by the franchisee who believes there will be profits as well for them in the operation of the branded business.
Franchisors, of course, don’t want the “startup failure rates” of franchisees to be advertised to prospective franchisees because this would make it difficult to recruit and capture franchisees without provioding some kind of PROOF that there would or could be actual profits for the new buyer who is investing in the franchise. There has been cooperation in the status quo to not produce any statistics concerning franchisee failure that would dry up the pool of potential targeted prospects. Entrepreneur Magazine deals with the success of the franchisor who is the advertisor in the magazine from whom they realize a great percentage of their income. The “big” franchisors use their visibility to suggest viability of the investment to new prospects.
FranchiSORS have better odds of surviving than the independent small business man and their own franchisees because they don’t share in the failure of their startup franchisees. The franchisors KNOW that the odds of the startup franchisee completing the ten-year and fifteen-year mandated franchise agreements are not good but they KNOW that they can count on the assets of the startup franchisees to continue to serve the franchisor in a high percentage of the startup failures. Churning thus becomes as management tool of franchisors.
Government regulation, the FTC Rule, and the FDD, assists the franchisors in obscuring the risk of failure of their units because the franchisors themselves are not required to disclose the UNIT PERFORMANCE STATISTICS in their possession to new buyers of their franchises. Due diligence investigation of Item 20 references is inefficient and ineffective and Item 20 of the FDD just passes off the obligation of the franchisor to disclose to the current and ex-franchisees. Earnings Claims are not mandated under disclosure law and after almost 30 years of regulation, the great percentage of franchisors don’t disclose “earnings” or make ANY representations as to the success and profits of the franchise WITHIN the franchise agreement. Once the agreement is signed by the franchisee, the franchisor is protected from failed franchisees in the courts and in arbitration from charges olf fraudulent inducement to contract through misrepresentation of the success of the franchise or failure to disclose the risk.
This, obviously, as indicated by Robert Purvin of the AAFD and Susan Kezios of the AFA, over ten years ago, was the intent of the FTC Rule and the current regulatory policy. The irony is that the government can now state that the “regulation of the industry” has reduced fraud in the industry. The package of the FDD and the adhesory franchise agreement works as a constructive fraud against prospective inexperienced Mom and Pop franchise prospects who sign these boilerplate contracts in good faith that there is very little risk and who find out too late that the actual risk and profitability of the investment was never disclosed to them under law.
Just look at Quiznos, The UPS Store, Cold Stone Creamery and others and read the history of the Coffee Beanery Case and SonaMedSpa on Blue Mau Mau, Franchise Pundit, and Franchise Pick to see this regulatory policy in action,.
LET THE FRANCHISEE BUYERS BEWARE.
July 29th, 2008 at 12:11 pm
[…] while three closures out of seven may be a good percentage, especially considering the failure rate of startups in general, it is important to note that two of the four remaining, Numly and Registered Commons, are […]
August 21st, 2008 at 1:41 pm
Your theory of failure is interesting but the 90% quotation comes from none other than a decades old Dun & Bradstreet study of thousands of new businesses from their first through their tenth year. What most failed to understand is that the study encompassed all forms of failure to continue including insolvency, abandonment, sickness, death, closure, sale of business, loss of lease, acts of god etc etc. The D&B stats were real hard numbers but they didn’t drill down into the systemic causes of entrepreneurial stoppage vs real failure. As I see it selling a business within the first 10 years of start-up is not necessarily a bad thing. The more important part of that study was the causal effects of failure. Armed with this information, we have built a 40+ year old consulting service to assist entrepreneurs with disabilities to build effective alternatives to regular employment. I have also taught accessible entrepreneurship to vocational rehabilitation counselors, entrepreneurs and youth with disabilities for the past 10 years.
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