You’ve probably heard the oft quoted statistic that half of all businesses are gone within five years. While the number is true, it’s an average of what happens to start-ups in all industries, from biotechnology firms to dental offices to taxi services. And new business survival rates differ pretty substantially across sectors of the economy.
To show you how much difference industry sector makes, I have plotted the five year survival curves for the 2000 cohort (the most recent available) of start-up establishments using data from the Longitudinal Business Database of the U.S. Census.
Click for larger graph in new window
As you can see from the figure, 13.2 percentage points of difference separate the five year survival rate of businesses in the finance, insurance and real estate sector (57.4 percent) from those in transportation, communication, and utilities (44.4 percent). That’s a pretty sizeable gap. Clearly a new business’s odds of survival are much higher in some industry sectors than in others.
Of course, survival rates aren’t necessarily the same for all sectors over time. Given what’s happened in the economy in the past couple of years, the odds that finance, insurance and real estate businesses started in 2008 and 2009 make it to their fifth birthday might be very different from the numbers shown in the figure.
Nevertheless, the data make an important point to would-be entrepreneurs. Your chances of creating a long-lived business are greater in some industries than in others.
You might want to factor this information into your decision to start a business. Many lenders and investors do.
It was a bit hard to read the graph, even if I have good eyesight. Do you have link to the graph?
What is your suggestion if you pick an industry with a lower “survival rate”?
Thanks for pointing that out. Yes, for some reason when I converted the chart to an image, the font got very small.
I have loaded a larger chart — click the existing chart and it will load in a larger size in a new window.
It’s a bit fuzzy, so I will try to replace it with a clearer image later on. But I think you can see the industries listed.
LOL, I thought the same about visibility. I’m an entrepreneur, but not always successful. Throw these numbers on the curb and challenge yourself and your associates to believe. I’ve worked, managed, and owned many different business throughout my career and the most dominate common denominator of success is effort. I have never met anyone that failed by working their ass off. The problem with the 50% of entrepreneurs that fail is their lack of effort or stupidity. You can’t fix stupid. Most people assume because they are the best widget maker that their god given skill set will transfer to owning and managing a business. It will never work like that. The 50% that fail didn’t have a clue to start with.
Could you put the data in a chart as well? Might be a little easier to process.
We’re working on getting an improved chart for this, Robert. 🙂
Doc, what I finding disturbing is the aggregate slope is 0…your thoughts? Can one infer the American dream is limited to a short-run dream? How does tax policy and capital formation hurdles tighten the noose?
Just to clairify my remarks; I submitted remarks to indicated the multiple slopes were negative, yet the corellations were positive… These differenciations were not captured in my initial comments…
Sir, Do you happen to have any statistics on HVAC companies? I’m just now starting. Any data would be greatly appreciated. Thank you.
This data is compelling and anyone considering entrepreneurship should take a good look. Thank you for sharing this with us Scott!
Through our work with start-ups, we also find that about one half survive beyond the five year mark. Those that do typically have reinvented their business along the way. I believe that it is the ability to adapt over time that allows one business owner to survive and thrive, while those unable to reinvent find themselves forced to close their doors.
Holly Magister, CPA, CFP
Great info, thanks Scott.
I also have found if you answer four key questions before you launch your odds of success increase exponentially.
I shared the questions in my blog post : http://nosmokeandmirrors.wordpress.com/2010/07/26/%e2%80%9cpushing-mud-uphill%e2%80%9d-%e2%80%a6launching-a-new-product-or-service-without-four-clear-%e2%80%9cyes%e2%80%99s%e2%80%9d/
Without four “yes’s” you are blindly hoping to