The Entrepreneurship Lottery

Do a small number of entrepreneurs create very valuable companies while most create companies that are largely worthless, or do a large number of people create companies of modest value? The answer, at least according to one set of data, appears to be the former.

To address this question, I commissioned a special tabulation from the U.S. Census to see what level of sales the different companies in single cohort of start-ups achieves at age six. I picked age 6 since that seems to be an age at which most sophisticated angels and venture capitalists are trying to exit their investments.

I had to look at a fairly old cohort (1996) because I needed sales data six years later and Census hasn’t yet released the 2007 data that would permit analysis of a later cohort.

Census provided me with the count of the number of new single establishment businesses started in 1996 and the number that had reached following sales levels in 2002:
between 1 and $99,999;
between $100,000 and $499,999;
between $500,000 and $999,999;
between $1,000,000 and $4,999,999;
between $5,000,000 and $9,999,999;
between $10,000,000 and $49,999,999;
between $50,000,000 and $99,999,999;
and $100,000,000 plus.

Most exits of companies are by sale to another private company. So I used Pratt’s Stats estimates of the price-to-one-year-sales multiple for sales of private companies over the period to calculate the value of six year old businesses.

The median (typical) company was worth nothing at age six. But the value of six year old companies is incredibly skewed. The table below shows the proportion of start-ups accounted for by companies with different levels of sales and the proportion of the value created by businesses of that sales level.

Startupvalue per Professor Scott Shane

The 83 percent of companies that have less than $500,000 in sales at age six account for only 4 percent of the value of the cohort of companies. By contrast, the 1.6 percent of the companies that had sales of $5,000,000 or more accounted for 54.2 percent of the value of the cohort. In fact, just the 175 companies that had reached $100,000,000 in sales or more in year six accounted for 14.5 percent of the value of the 1996 cohort of start-ups.

Generating significant financial value is something done by a very small percentage of start-ups, but a handful that do generate a lot of value.

* * * * *

About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.


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.

21 Reactions
  1. Hmmm, Scott, stirring up the pot again!

    I do not buy into the statement: “The median (typical) company was worth nothing at age six.”

    I think there are built-in biases to that statement.

    (1) You’re speaking from the perspective of VCs and angel investors, who are interested in only a tiny percentage of startups. Most entrepreneurs couldn’t care less about investors. A business is successful and worth something if the owner manages to earn a nice living from the business, create something bigger than themselves, set something aside for their retirement and possibly hire a few employees or contractors. This is how MOST entrepreneurs would view “success” and “worth.”

    (2) I’m not sure how you calculated the “worth nothing” statement, since you didn’t share the underlying metrics. But even very small businesses — although difficult to sell under a certain size — have some value. And in fact, very small businesses are sold every day at places like, where the median revenue range of sold businesses for Q2 2008 is $395K with a sales price of $200K. Web businesses as small as $20K or $30K in annual revenues are sold all the time at places like Sitepoint Forums. Maybe their sales price is a pittance to a VC, but trust me, they have “worth” in someone’s eyes (and checkbook).

    (3) Investors want to cash out and drive a business to get to a certain size for that purpose. Most entrepreneurs are not thinking about cashing out at year 6. They are on a different time schedule altogether.

    To say that a small business bringing in $40K or $400K annually at year 6 has no value — is to belie the contributions of entrepreneurs everyday.

    — Anita

  2. I suppose for me personally it’s how you define “value.”

    My 5-year-old boy is lustily singing Spider-Man a room away, while my 2-year-old daughter checks her teddy bears’ blood pressure. And I get to go play a game of Trouble with them in a minute.

    I’ll trade that kind of morning for seven figure sales any day.

  3. Anita,

    When I say value here, I am talking very narrowly of what the business is worth in financial terms, not the utility people get from their businesses. The median or typical start-up has zero financial value in year six. That may be because the median or typical start-up has zero revenues in year six.

    It is very important to distinguish between the value of SURVIVING businesses in year six and the value of the start-ups from a given year. The businesses that you are talking about on are, by definition, SURVIVING businesses. For surviving businesses the Census data are pretty close to the BizBuySell data you report. The median value of a six year old surviving business was $204,000 in 2002.

    The median price-to-one-year revenue numbers for the typical business in 2002 was 0.68. That’s higher than the rate you report from BizBuySell, but that could be the difference between 2002 and 2008 or between Census data and their data. In any case, the figures are comparable.

    The important thing here is that the median entrepreneur invests $25,000 to start a business. If the entrepreneur could invest conditional on the business surviving then the value of the surviving business would make sense to look at. But he/she invests in general. As a result, the typical entrepreneur probably loses money on his/her investment.

    The successes make up for the typical ones, though. By the way, this is true for sophisticated angels who invest in angel groups. The median return is $40,000 on $50,000 invested. Again, the averages are very different because of the skewness.

  4. From a big picture macro-financial standpoint the numbers are what they are. But many small business folks, entrepreneurs, solopreneurs, etc. aren’t micro-focused and aren’t really trying to create “big” companies. Many of them left big companies for various reasons, and aren’t focused on replicating that experience. A good number of people created their personal business with more than just the financial payoff in mind. Money is definitely at or near the top of everyone’s list. But other things factor in like having more control over their time, who they choose to do business with, and being able to concentrate their efforts on what they love doing w/o the distratctions that come with empire building.

    The numbers are what they are, but they only tell a fraction of the overall story of how valuable “worthless” small businesses are. Especially to the owners.

  5. Brent,

    Absolutely. I think you said this better than I would have.

    In fact, we have data on self-employment which shows that you need to pay people twice as much as they could earn working for themselves to get the same amount of job satisfaction (on average) as they have being self-employed.

    If we piece together all of the numbers, it seems that the typical entrepreneur earns less than they would have earned working for someone else, generates a business with zero financial value and are happier as a result.

    There are two very interesting themes here: the first, which was the focus of my post, is that returns are very skewed so that the typical person isn’t generating a lot of financial value from starting a business. The second is that financial value from starting a business and personal benefit from starting a business are not very closely related. I think I’ll follow up next week with that theme.

  6. Scott,

    Just curious, do you have the data for this cohort at the the 1 year mark and the 3 year mark? It’d think it be cool to see if (or how) the distribution changes from 1 to 3 to 6.


  7. I think these stats are very refreshing. It proves that most american start-ups are focused on things other than making a pile of cash. It could be argued that maybe these folks DID want to make alot of money and simply failed at doing so, but I think those folks wouldn’t stick around for 6 years.

  8. Interesting that companies doing 1-5 million in sales contribute most to the overall value of startups. What percentage of all of these companies brought on investment capital? Another question I have in regards to these stats are what percentage of these companies grew from the lowest bracket? Did any of these companies start out doing 1 million in sales/year? …

  9. Andertoons and Matt R, I agree with you both. I try to remember that money is not everything. It shouldn’t define you as a person. For me, a successful business is one that you enjoy and gives you freedom to spend quality time with the ones you love.

  10. Ron,

    I think one of the most important statistics I have uncovered in recent years is the one you just pointed out. It appears that the companies doing $1-5 million in sales in six years (which are way too small to interest VCs and most sophisticated angels) generate the most value. Clearly it’s because there are so many more of them than the VC and angel backed companies. But there are very few efforts to encourage these kinds of companies. Perhaps need a policy focus here.

    I don’t know what percentage of these companies brought in outside investment. that’s knowable from Census data, but not the published data.

    Very few of the companies started out doing $1 million in sales. I suspect that the number is so small that it wouldn’t change the statistics much.


    I agree that the change in the distribution is interesting. I wish I had the data for the one and three year marks but I don’t. It’s getable. Someone just has to pay census for it.

  11. Hi Brent,

    Very well stated: “The numbers are what they are, but they only tell a fraction of the overall story of how valuable “worthless” small businesses are. Especially to the owners.”

    We all have different reasons in starting a business, ending up a business or even to the point on how and when we could define our business to be successful or a failure. The numbers presented in this data just showed for what they are – and only for what they are!

  12. What an amazing conversation. I wonder if we are evolving new ways of measuring value. I’m reminded of an old article I read in the Atlantic Monthly back in 1996 (I can’t believe I still remember this!) “If GDP is up, then why is America Down?” The point of the article was that GDP may NOT be the best measure of overall economic health because it only measured the exchange of money and not the overall value or “goodness” from the exchange. So divorce, for example (which created a “new” household” would yield an increase in purchases as a family broke up and had to buy duplicates of things that used to exist in one household. Or Crime would increase the purchase of theft protection devices. These were “bad” events but led to an increase of money exchanged (perceived as growth) HUH?

    So, perhaps as more and more people flee from “big” bad corporate money focused businesses for more intrinsic lifestyle value – we may have to focus defining value differently.

    None of this changes the fact that there will always be people who are in it to win the big bucks. That is a whole other objective – to build monetary value into a business.

    So this brought to light that we can’t assume that every start-ups goal is to become the next Microsoft. We can see the numbers as Scott showed them and know what that population did in that period of time and assume that a similar population will behave the same way over time.

  13. QUESTION #1:
    Scott, how does your data compare with that of David Birch (Cognetics) whose research was published in the late 1980s? Has anything changed?

    Birch focused on job creation rather than wealth creation in his analysis, but as I recall he found much the same distribution as you did. I think he called those companies who did not add jobs “income substitutors” rather than “businesses,” in that their goal was to take care of the owner and his or her family rather than to create jobs/wealth.

    QUESTION #2:
    I think the $1-5M band is interesting. It is a lot easier to reach this level via organic growth and a small staff or outsourcing and in a niche…within this band, what is the median value? I would imagine it is close to $1M.

    When I was an entrepreneurship trainer at an SBA program, we targeted this band to work with. The issues they had were growing the CEO’s skills and creating structure in the business. Only a small minority was able to move past those issues when the business was a startup (e.g., not a franchise or purchased business).

  14. This article reminds me of what I hated about college. The professor spews out a bunch of facts – especially ones that are discouraging – and then ends the class. That is not what we want in the real world. How about some information that we can use. How about some suggestions for getting into the category where the money is made. That’s the hard part. But the hard part is never what the professor shared – probably because they never knew how to do the hard part…

  15. Joel,

    It’s a bit difficult to put a large amount of information about “how to get into the category where the money is made” in a single blog post, particularly a post that was only intended toget people to pay attention to the fact that money is only made in a small portion of ventures. My hope was that these few facts would motivate people to look at the information about what makes some entrepreneurs more successful than others.

    If you want that information, you might take a look at some of my other posts. You also might want to take a look at my books and articles on the topic. You can get to that information through my web site.

    I’d be happy to talk to you about that information at any time.

  16. Good post Scott. I always enjoy your thoughts and your books. I too left the corporate world for a six year fling (just a coincidence) at small business. And I convinced myself that my quality of life and freedom from corporate tyrannies would sustain me. Even wealth-building would be right around the corner. What a bunch of hooey.

    I’m never surprised when “successful” business owners lambast any negative thoughts about small business startup or ownership. They are dismissing the hard facts to make themsevles feel better about their choices.

    Scott has said it best in his most recent book: small business owners do not make as much money in their business as they would have made working for someone else. My experience also says that entrepreneur’s time freedom is a myth, family and friends suffer from this. Initial investment and any subsequent investment in the business is lost with economic hardship to follow. Try to get a job after being out of the market for five or more years.

    The best choice, if you like the loose structure and environment of a small business, is to get hired by one of the VC-backed firms. The only risk you take is loss of your job. Okay everyone, let me have it.

  17. Great post, thanks for the information. This data is very interesting, more data would also be great – are you planning on a paper on this? If so I hope it is published openly (open access). It would also be nice to see such data over a couple of periods. It seems to me this might be significantly different in different periods. I am actually surprised how many companies were so successful so quickly (maybe that shows I am just not very well read on this topic).

  18. Almost every big company today, started out as a small start-up company…

    My company venture belong to this “failed” category. We have invested more than $25,000 in capital and several thousands of hours are put into the business. But I am pretty sure that the outcome of this attempt will be a new start-up company that will generate plenty of money and value created in the long run. You are welcome to follow our business “cycle”! 🙂

    Joel Block: I like the name of your company. As a fan of Aristotle, the father or Logic, I think you have given your company a great name. I tried to sign up for your blog notification service, but I got this message:

    “Form attempted to post on an insecure port.
    Your data has not been forwarded.”

    Could you please send your guide to me by email?

  19. As the site Editor, let me remind everyone:

    Stick to arguing about issues and facts.

    Do not attack the author personally for his views.

    One of the comments here is borderline abusive, and if it were not for the fact that Scott responded to it (keeping his cool, I might add), I would have zapped it out of here.

    Let’s stay civilized, people.

    — Anita

  20. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


  21. choose golf clubs

    Very Interesting Post! Thank You For Thi Information!