June 23, 2017

Are Startup Failure Rates as Bad as They Used to Be?


Are Startup Failure Rates as Bad as They Used to Be?

The chances of your business surviving past the five-year mark are somewhat better than they used to be, says one economics expert.

Are Startup Failure Rates as Bad as They Used to Be? Dr. Scott Shane Weighs InAccording to research and commentary from Dr. Scott Shane, professor of economics and entrepreneurial studies at Case Western Reserve University (and long-time SBT contributor), startup failure rates have declined slightly for employer firms in recent years.

“In 2010, the odds that a business would fail were lower than in 1980,” Shane confirmed in an email to Small Business Trends,.

Shane stated that three factors govern a small business’s survival rate: age, size and industry, in that order.

“Failure rates drop dramatically as firms age,” Shane said. “This is true across all sectors of the economy, all geographic locations and all time periods.”

As to business longevity, size matters, he said. The bigger the company, the less likely it is to fail.

Finally, industry plays a significant role. Data from Shane’s reports (see below) testify that sectors such as education, healthcare, mining and manufacturing fare better than others — information technology and construction, in particular.

Small Business Survival Report Summaries

The following seven reports, the first by Small Business Trends CEO and publisher Anita Campbell, the next six by Shane all published over an 11-year period, dating from July 2005 to January 2016 paint a more complete picture of the situation. But Campbell’s initial report deals with at what age most small businesses fail.

July 2005: Business Failure Rates Highest in First Two Years

Data from the U.S. Bureau of Labor Statistics revealed that most businesses that fail do so within the first two years.

“Across sectors, 66 percent of new establishments were still in existence two years after their birth, and 44 percent were still in existence four years after,” the Bureau’s statistics showed (PDF).

These findings square with Shane’s reports, which follow — survival rates vary by industry. In this case, the education and health services sector showed the highest survival rate while the information technology sector had the lowest.

It should be noted that the report covered the period from March of 1998 to March of 2002 — the height of the dot-com boom.

April 2008: Startup Failure Rates — The REAL Numbers

In his inaugural report, which used Bureau of the Census data produced for the Office of Advocacy of the U.S. Small Business Administration from 1992 to 2002, Shane found that the survival rate for startups dropped precipitously the first year (25 percent) and then fell another 11 percent the second year. Even though it began to level off after that, each year showed further decline. After ten years, only 29 percent of businesses remained.

Shane alluded to the fact that there are “considerable differences” across industry sectors in business failure rates but did not elaborate, saying that he would do so in a later article.

May 2008: Startup Failure Rates Vary — Choosing the Right Industry Matters

Shane followed up his initial report a month later sharing data from an article by Amy Knaup in Monthly Labor Review, published by the Bureau of Labor Statisics, which looked at the 1998 cohort of new businesses.



As Shane suggested in his first report, survival rates varied based on industry. For example, the four-year survival rate in the information sector was only 38 percent while survival rate for startups in the education and health services sectors were 55 percent. (Those are the same industries that Campbell found in her report as being at the bottom and top of the scale.)

“[T]he average start-up in education and health sector is 50 percent more likely than the average start-up in the information industry to live four years,” Shane said.

He added that the industries that have lower initial survival rates tend to continue with those rates every year.

May 2012: Businesses Face High Rates of Infant Mortality

After a several year hiatus, Shane returned in May of 2012 with another report. This time, he used data from the Bureau of Labor Statistics 1994 cohort, which showed the percentage of businesses alive in a given year that failed during the subsequent year.

Shane found, for example, that the proportion of businesses started in 1994 that failed in 1995 was 20.2 percent while the percentage of those still alive in 2010 but which failed by 2011 was a mere 4.3 percent.

Shane also found that the new business failure rate for companies started in 1994 steadily declined until 2006 and then flattened out.

“While the odds of going under never disappear, they pretty much hold steady at 5 percent once the businesses reach age 12,” he said.

Sept. 2012: Small Business Failure Rates by Industry: The Real Numbers

Shane reported again in September of 2012 on data drawn from the Census Bureau Business Dynamics Statistics for the year 2005, which reinforced his assertion that survival rates vary by industry.

He compiled the data into a graph that compared survival rates among the following eight industry sectors:

  • 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)

As you can see, mining companies had a 15-point higher rate of survival than construction firms.

Dec. 2012: Startup Failure Rates: The Definitive Numbers

At the end of 2012, Shane came back with a report that said business startup failure rates had not changed much since his inaugural assessment in 2008.

Citing data from the Census Bureau and Bureau of Labor and Statistics, Shane stated that both data sets revealed that the “typical new business started in the United States is no longer in operation five years after being founded.”

Jan. 2016: Business Failure Rates Are Declining

Shane’s most recent report — published in January of this year — brought good news: business survival rates are on the rise following the “bust” of the 2008 Great Recession, which brought a spike in business failures.

Referencing Census Bureau statistics, Shane said that business failure rates and the fraction of American employers that go under each year are in long-term decline.

He found that in 1977, 12.9 percent of U.S. companies with employees went out of business, but in 2013, that fraction was down to 9 percent.

“While recessions cause spikes in business failure rates, the long-term tendency is toward more, not fewer, small businesses surviving,” Shane said.

Conclusion

These startup failure rates reports conclude that the chances of your business surviving beyond five years depends on its age, size and industry sector.

While, historically, only half to less than half of companies are still in business after five years, survival rates are slightly better now than in years past, so there is a  reason for hope.

Of course, the data is empirical. It fails to take into account intangible qualities such as the entrepreneur’s passion, grit and determination to succeed. While those can’t be measured, they play a critical role nonetheless.

Failure Photo via Shutterstock

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Paul Chaney


Paul Chaney Paul Chaney is a Staff Writer for Small Business Trends. He covers industry news, including interviews with executives and industry leaders about the products, services and trends affecting small businesses, drawing on his 20 years of marketing knowledge. Formerly, he was editor of Web Marketing Today and a contributing editor for Practical Ecommerce.

3 Reactions

  1. Joel Libava

    Great article, Paul

    Good to know things are getting better for startups!

    The Franchise King®

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