“Mamas don’t let your babies grow up to start construction companies,” could be the first line of a country song about new small business failure rates. Five years after starting, the share of mining companies remaining alive is nearly 15 percentage points higher than the fraction of construction businesses still in operation (52.3 percent versus 36.4 percent).
Five Year Survival Rates for Startups by Industry Sector
Source: Created from data from the Census Bureau’s Business Dynamics Statistics
In the figure above, I have plotted the five year survival rates for new companies founded in 2005 using data from the Census Bureau’s Business Dynamics Statistics.
While there are many sources of data on start-up failure rates, these are probably the best. They come from a longitudinal database of businesses that government economists and statisticians created by linking together annual administrative records, such as unemployment insurance filings. (The use of administrative records eliminates errors that emerge from efforts to survey company owners.)
Because the database was designed for researchers, the data are not presented in the most user friendly way. Therefore, I have reorganized them into a chart which shows small business survival rates by industry sector.
As you can see, the odds that a new business survives its early years vary a lot by sector. In order from highest to lowest five year survival rates, the sectors are:
- mining (51.3 percent)
- manufacturing (48.4 percent)
- services (47.6 percent)
- wholesaling and agriculture (47.4 percent)
- retailing (41.1 percent)
- finance, insurance, and real estate (39.6 percent)
- transportation, communications and utilities (39.4 percent)
- construction (36.4 percent)
Therefore, if you want to know about small business failure rates, it pays to understand them by industry sector.
About Scott Shane
Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. 
It’s good to see that half the sectors are pretty much at 50%. That’s much better than the rates we often hear thrown around.
Thanks for that interesting data, Scott.
Please tell Anita and the rest of the gang at Small Business Trends that I’m going to be out of a pocket for a few days.
I’m going on a hunt…for a mining company.
The Franchise King®
Joel: I could give you some tips on mining companies… Think precious metals. Did you know that 3M (with products like Post-It and Scotch Tape started as a mining company?
I recommend you to check out the book, “The Collapse of the Dollar and How to Profit From It”, for more information about the commodity industry.
Thanks for that 3M reminder, Martin. And thanks for that book recommendation, too. The Franchise King®
Joel: You are welcome! Did you know that Nokia started with rubber boats and tires? Maybe they have to go back to basics again?
Scott, your findings are very interesting, but do not tell the whole story. The data points and timeline uses a period when the real estate market went from boom to bust.
If you you drill down, your data shows that finance, insurance and real estate suffered almost a much. Two things occur during a period of boom and bust. New businesses form to fill the demand, in this case, new homes. This caused a surge in real estate development companies, builders, General contractors who hired primarily sub-contractors (workers who operated as sole-proprietors, and individuals who formed Sub-S corporations).
Add to that all the construction related service businesses.
Everyone and his mother became real estate agents and brokers, once again many were independent contractors. How many mortgage brokers and insurance brokers, once again, primarily self employed independent contractors, would you meet at a networking event in 2007?
When the bust finally arrived in 2008, all of these industries suffered. The results are skewed by both the time frame used, and the number of self employed business formations.
Looking ahead to a 5 year period starting from 2010, your results will be significantly different. I dare predict that retail will probably be the biggest loser, and real estate and financial services could be among the leaders.
Thanks for letting me add my 2 sense.
Bruce Silver
Employers Rx LLC
The CURE for your employee management headaches
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Scott, this is excellent information. If you look through your trackbacks you’ll see that we reference these numbers again and again on our blog, which focuses on credit management and getting paid in the construction industry.
You say “Mamas don’t let your babies grow up to start construction companies,” and you couldn’t be more right. The construction industry is saddled with payment problems and financial risk. Fortunately, there is a lot of legal tools and options out there to help contractors offset this risk, but it takes a savvy business person to know this stuff and to keep up with it.
Unfortunately, I think the failure numbers in this industry will remain pretty consistently high.
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