Have you ever heard the statistics that 90% of businesses fail within the first year? Maybe you've heard that it's in the first 5 years, or that it's actually 80 percent of companies, but chances are you've heard a number like that at some point in your life, without much direct evidence to back it up. .
It is true that most startups fail – only a minority achieve success – but the statistics are not as dramatic as some would have you believe. On the contrary, failure tends to develop along a curve, and understanding that curve could help your business avoid falling victim to the most common pitfalls.
What are the “real” statistics of business failure? It's a complicated question, because definitions of “failure” can vary, and of course there are many different types of businesses, each with different survival rates.
Still, there are some fundamental data we can use to better understand what the failure curve really looks like.
According to the SBA's most recent report, using data from the Bureau of Labor Statistics, about two-thirds of all businesses with employees last at least two years. Not bad odds compared to the “90 percent” statistic that persists.
The same study found that the same group of businesses tends to last at least 5 years at a rate of about 50 percent.
This data comes from a period of more than a decade, dating back to the 1990s. The curve was not significantly affected by times of economic prosperity or recessions, making the success and failure rates be even more consistent.
Have you ever heard anyone say that restaurants and bars are especially risky business investments because they have a higher failure rate than other businesses? The data suggests that this is not true. The food and hospitality sector has a similar failure curve to the manufacturing, construction and retail sectors. The differences are insignificant at almost all points on the curve.
As you might expect, the failure curve is steepest at the beginning, with 25% of small businesses failing within the first year, according to data collected by Statistic Brain. This is likely due to the learning curve associated with owning a business; The longer you stay in business, the more you learn and the more you resist problems that might otherwise shake your foundation. It is a period that naturally eliminates weaker candidates as well.
According to the same data, a whopping 46 percent of all business failures were attributed to “incompetence,” a general term that can refer to emotional pricing, non-payment of taxes, lack of planning, lack of knowledge of financing and/or lack of experience in record keeping. Another 30 percent of business failures were attributable to unbalanced experience, or a lack of management experience.
Of course, for venture capital-backed startups, the picture is not so pretty; According to one report, around 75 percent of all venture-backed startups end up failing. This may be due to several reasons, such as the highly competitive nature of venture capital competitions and the volatility of technology companies emerging on the scene.
If reading these statistics you're still worried about your business being classified as a “failure,” keep in mind that failure can actually be a good thing. To begin with, many businesses that fail in the first year did not have the potential for long-term success; Early failure saves them significant expenses and frees their entrepreneurs to pursue more valuable opportunities.
Additionally, 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 chance of success the second time.
So what should I take away from all this? First, if he has thought about becoming an entrepreneur, but is intimidated by the idea of being part of the overwhelming majority of failed entrepreneurs, reconsider his position; that majority is not as strong as you might have previously believed. All entrepreneurs face failure in some way, but it doesn't always lead to failure of the entire company.
Second, if you can get through that first year of testing, you can probably sustain your business successfully for years.
And finally, even if your business fails, it's not the end of the world; You will have new knowledge and new experiences that you can use to fuel your next company.
