Failure to Launch?

If you believe that 90 percent of small businesses fail in their first year, you probably also believe that Bill Gates will send you cash for forwarding an e-mail message. Neither story is true, yet neither will go away. Brian Headd, an economist at the SBA Office of Advocacy and author of a 2003 report on small-business closure rates, says the first reliable study of the topic came out in 1989, showing that approximately half of all new businesses were still operating after four years. Headd and other researchers have had similar findings. “To my knowledge, none of them nor myself have run into a substantiated finding [showing] 9 out of 10 fail the first year,” Headd says.

So why did The New York Times quote the 90 percent figure nearly a decade after that 1989 study? And why, as late as July 2006, did the St. Louis Post-Dispatch repeat it again? No one knows. A full illumination would have to decode the puzzling appeal of all those improbable, emotionally charged urban legends. At any rate, it seems clear that some people simply want to believe that entrepreneurship is harder than it really is.

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One reason they’ve been able to continue believing may be the shortage of solid numbers on how long companies last. “We don’t have very good firm age data,” admits Headd, who analyzed Census Bureau surveys. Other researchers used Bureau of Labor Statistics records and statistics from private data collectors. All leave something to be desired, especially when it comes to the non-employer firms that make up the majority of businesses. The good news: SBA’s Office of Advocacy has convinced the Census Bureau to do a study of annual entry and exit rates of even the smallest businesses. Within a year or two, a fresh wave of research reports should put yet another nail in the coffin of the 90 percent failure rate myth.