Innovation & Insights

The Business Failure Myth

Sam Frentzel-Beyme Follow Managing Partner & Strategy Director

The Short of It

  • The notion that 9 out of 10 businesses fail after the first year is incorrect.
  • 66% of new employers survive two years, 50% survive four years and 40% survived six years or more.
  • Those with $50,000 or more have low closure rates and those with no starting capital and young owners have high closure rates, with the interesting twist that companies with zero starting capital had lower closure rates than those with $50,000 or less.

There is still a generally accepted myth floating around in the entrepreneurial world that 9 out of 10 businesses fail after the first year. Even with studies in the late 1980’s and early 2000’s there are still calls to the U.S. Small Business Administration on what the source of that “fact” is.

Well, I have some good news. There isn’t one. A study in 2002 by Brian Headd in the Journal of Small Business Economics (not surprising that the fact hasn’t made it out yet), used the U.S. Census Bureau’s Business Information Tracking Series to show that 66% of new employers survive two years, 50% survive four years and 40% survived six years or more. This confirmed earlier studies which pretty much showed the same thing.

In terms of reasons for closure, it is all pretty much common sense. Those with $50,000 or more have low closure rates and those with no starting capital and young owners have high closure rates, with the interesting twist that companies with zero starting capital had lower closure rates than those with $50,000 or less. Manufacturing also showed lower closure rates than service and retail trade firms, which makes sense because the infrastructure that’s needed in manufacturing. There were also some other factors that tended to increase survivability:

  • Age of the owner(s)

  • Previously owning another business

  • Having multiple owners

  • Being home-based at startup

  • Being an employer

  • Having a college degree

  • Starting a business for personal reasons

Overall, the study reflected what one would expect regarding success. Putting more into a business, both in terms of experience and financial resources, keeping initial costs down and pooling knowledge among founding partners, improves the potential for the business to work it’s way quickly through initial growing pains towards profitability.

Every week, we highlight key transformations and trends. Follow us on Twitter.