Good News! The Chances Your Startup Will Fail Aren't as High as You'd Thought.
Ever heard the statistic that 90 percent of businesses fail within the first year? Or maybe you heard that it was in the first five years, or that it's actually 80 percent of businesses. Chances are you've heard some discouraging number like this at some point in your life, without much direct evidence to back it up.
True, the majority of new businesses do fail -- and only a minority ever find real success -- but the stats aren't nearly as dramatic as some would have you believe. Instead, failure tends to unfold over a curve, and understanding that curve could keep your business from falling victim to the most common pitfalls.
The startup failure curve
So what are the "real" statistics for business failure? That's a complicated question, because definitions of "failure" vary; and, to be certain, there are many different categories of businesses, each with its own, and different, survival rate. Still, there are some critical facts you can use to better understand what the "failure curve" really looks like:
Some 66 percent of businesses with employees survive at least two years. According to the most recent report from the Small Business Administration, using data from the Bureau of Labor Statistics, about two-thirds of all businesses with employees last at least two years. Those aren't bad odds compared to the "90 percent" statistic that persists.
About half of businesses survive at least five years. The same study found that the same group of businesses tended to last at least five years, at a rate of around 50 percent.
The economy does not directly affect the failure curve. This data covers a span of more than a decade, stretching back into the 1990s. The curve was not significantly affected by times of economic prosperity or recessions, making rates of success and failure even more consistent.
Failure rates are similar across industries. Have you ever heard someone say that restaurants and bars are especially risky business investments, since they have a higher rate of failure than other businesses? The data suggests this isn't true. The food service and hotel industry has a failure curve similar to that of the manufacturing, construction, and retail trade industries. The differences are negligible at nearly every point on the curve.
Some 25 percent of businesses fail the first year. As you might expect, the failure curve is steeper at the beginning, with 25 percent of small businesses failing within the first year, according to data compiled by Statistic Brain. This is likely due to the learning curve associated with business ownership; the longer you remain in business, the more you learn, and the more resilient you are to problems that could otherwise shake your foundation. This is a period that naturally weeds out the weakest candidates as well.
Reasons for failure vary. According to the same data, a whopping 46 percent of all company failures are attributable to "incompetence," a blanket term that can refer to emotional pricing, failure to pay taxes, a lack of planning, a lack of financing knowledge, and/or no experience in record-keeping. Another 30 percent of company failures were attributable to unbalanced experience, or a lack of management experience.
Some 75 percent of venture capital-backed startups fail. Of course, for VC-backed startups, the picture isn't as pretty; according to one report, about 75 percent of all VC-backed startups ultimately fail. This could be due to a number of reasons, including the highly competitive nature of VC competition and the volatility of tech startups overall.
When failure is a good thing
If you're reading these statistics, and you're still worried about your business being classified as a dud, keep in mind that failure can actually be a good thing. For starters, many businesses that fail in the first year didn't have the potential for long-term success; early failure actually spares them significant expense, and frees up the entrepreneurs backing them to pursue more valuable opportunities.
On top of that, going through the process of starting a business and watching it fall apart can teach you valuable lessons, which you can apply to future opportunities; failed entrepreneurs who get back on the horse have a higher likelihood of success the second time around.
So, what should you take away from all this? First, if you've thought about becoming an entrepreneur, but have been intimidated by the thought of becoming part of some overwhelming majority of failed entrepreneurs, reconsider your position. That "majority" isn't nearly as strong as you might have previously believed. Every entrepreneur faces failure in some form, but it doesn't always lead to the failure of the entire business.
Second, if you can make it past that trying first year, you can probably keep your business afloat for years to come.you can use to fuel your next venture. If you're truly an entrepreneur, chances are there'll be one.