Before you read any further in this column, answer the following question: What is the annual revenue of a typical start-up six years after founding?
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Unless you answered zero, you overestimated.
Most people forget that the majority of businesses fail within six years, leaving them with zero revenues.
Moreover, the start-ups that survive have very skewed performance. A few surviving companies reach substantial sales – three one hundredths of one percent hit over $100 million in sales in six years, according to U.S. Census data – but most don’t grow at all.
The result of this pattern is that they typical (median) performance of start-ups is far below the average (mean).
This pattern exists in all sectors of the economy. Below are data from the U.S. Census on the average and typical level of sales at age six of the most recent cohort of start-ups available, separated by industry sector.
Take a look at the wholesale sector, which provides the most extreme example of this pattern. The average new company had a none-too-shabby $2.1 million in sales at age six. However, the typical start-up had no sales at that age.
This statistical pattern is not just trivia. It has important implications for entrepreneurs, investors, and policy makers. If, by age six, the average and typical start-up’s sales were similar and both numbers were substantial, then a lot of entrepreneurs would be doing a good job of building businesses. This, of course, is the world that a lot of people would like to think exists.
But, if average sales are high, while typical sales are zero, then a few entrepreneurs are very successful, but most are not. Unfortunately, this is the pattern that we tend to see.
Here’s the rub. Starting a business takes time and money. The performance pattern that we see means that the typical entrepreneur is spending a lot to get relatively little.
Before policy makers tell everyone that it’s a good idea to be an entrepreneur, they should keep these numbers in mind. The people they encourage are more likely to have the typical outcome than the average one.