Date: December 30, 2010

Author: JT

Tags: , ,

9 Comments »

99% Failure Rate in 10 Years—I Don’t Buy It!

Every once in a while, I come across an article that makes me wonder, “Where’d they get that?”

For instance, consider this proffered ‘fact’ that, “It is no longer news that 99% of all new  small business venture started all over the world fail in the first ten years.” (http://bit.ly/dRSaWa) If the claim is true, maybe there’s something else worth considering…

Really? 99% of all businesses fail in 10 years?

The article suggests reasons businesses fail.  I agree with the article’s first point, managerial decision making. It’s something I touched on myself in Tuesday’s post (http://bit.ly/fVHgb6).

But I might add one more major point: Decisions made based on a lack of accurate (or ‘correct’) information.

Success demands we live with ambiguity. Yet comments like, ‘It is no longer news that 99% of all new small business venture started all over the world fail in the first ten years,’ are inflammatory, potentially paralyzing for some.  If you are a new entrepreneur, I’d like to take a moment to short-circuit this particular claim.

Earlier in my career I had routinely heard a ‘general rule’ that 95% of all businesses failed in 5 years.  Preparing for a presentation to new entrepreneurs a couple months ago, I wanted to speak to Fear, and this ‘rule’ popped to mind.  But I had no clue where this rule came from nor how current it may be.  So, rather than unwittingly present false data as fact, I did some digging.

Here’s what I found:

According to the US Small Business Administration: “Seven out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more.” (http://web.sba.gov/faqs/faqindex.cfm?areaID=24 #7)

Of course, this is US-specific.  Given that the US does far better at this type of reporting than most other nations globally, I suspect it may be impossible to find an equivalent ‘global’ number with any basis in fact.  (IF you do know of a global number, and can cite a source, please share.)

So, if you’re considering launching a new enterprise, let me be among the first to say, “Yes, it’ll be among the scariest things you might do, but the failure rate isn’t quite as bad as others may have you believe.”

9 Responses to “99% Failure Rate in 10 Years—I Don’t Buy It!”

  • Patrick Haggerty December 31, 2010 at 1:00 pm

    The 99% figure is probably unsupportable, but possible, I suppose – the numbers you are showing with 25% lasting at least 15 years is for “new employer firms” which is not the same as “new small business ventures”. I know one person who had a business going into 2010, started three more during 2010, and is now an employee. Two activities I treated as separate business ventures (no employees), one started about 15 years ago and one about 7 years ago, are still active, but no longer treated as separate from a business started 34 years ago (which, on occasion, might have one seasonal employee during one year and no employees during the next two or three).

    Then there are the people desperately searching for extra income who join one of the MLM (multi-level-marketing) organizations, drop out, start another a couple of years later, etc.

    And some businesses are sold within 10 years – goes out of business, but didn’t fail.

    And hobbies posing as businesses – in the US there is a presumption that you have a profit motive if you show a profit in three or more years during five consecutive years ending with the tax year in question. I could imagine some “business” activities being reclassified as hobbies as the owners lose interest or find out how easy it is to spend money without making money when there is an element of personal pleasure in the activity.

    Or, the comparison (how ever invalid) may be the number of businesses started during a year and the number of businesses started during the previous ten years that failed that year (grin).

    Or, possibly, as in the Mitch Snyder number of homeless people case, a number was needed, so one was made up. Remember that 64% of statistics are made up on the spot (which means there is a 64% chance that the 64% number I just used was made up on the spot – but it wasn’t – I found it in a PowerPoint on Gathering Data, the nonmathematical side of statistics – and it was probably made up for that presentation.

    [broken link snipped-JT]

    • JT December 31, 2010 at 4:47 pm

      Hello Patrick,

      As you so prodigiously demonstrate, there are always exceptions to every rule. At some point we need to make a decision as to what level of granularity we want to deal with.

      The SBA, without delving into granular justification, provided the content as I cited it. The SBA does not let us know whether they took many–or any–of the exceptions you’ve highlighted into account or not.

      The key point, as Patrick S. notes below, is that it’s important to identify claims that appear to be unsubstantiated in any form, lest they in appropriately dissuade the very people most interested in them.

      Key message for this post: It’s not as bad as it might have seemed. Game On!

      I do appreciate your notable effort in responding Patrick H. If you would, send me a known-good link by email, perhaps using an URL shortener (I like http://bit.ly/), and I’ll update the post with it for you.

      Cheers,
      JT…

  • Riccardo December 31, 2010 at 3:03 pm

    We need to encourage entrepreneurship, framed in the reality of the challenge. Thank you for pointing out the reality.

    • JT December 31, 2010 at 4:52 pm

      Hello Riccardo: I couldn’t say it any better. :)

  • Patrick Schutte December 31, 2010 at 3:28 pm

    JT:

    Great point! It’s amazing how often bad facts gain credibility because they are written down…and especially “bad news” like the one you reference.

    By the way, have your heard that President Obama is a Muslim?

    :) PS

    • JT December 31, 2010 at 4:38 pm

      Hello Patrick,

      Your comment was precisely why I posted this item. Thanks for coming by.

      :)

  • Ira December 31, 2010 at 6:24 pm

    JT,
    Thank you sharing and for the clarification. A 99% failure rate in 10 years is hard to believe even as a general statement. With such comments it could easily discourage anyone from even trying regardless of how great their product may be. Entrepreneurship isn’t for everyone, but one should certainly not make an attempt because of a non qualified statistic. Know your business, know your customers and make the effort. If you fail, you learn from it and build your career. If you succeed, then challenge yourself to the next level of your business. Either way, you reap the benefits of trying!
    -Ira

    • JT January 4, 2011 at 4:35 pm

      Spot on the money Ira, thanks for confirming I got the thought across properly:).
      JT…

  • Mark January 2, 2011 at 1:19 pm

    When I started by business in 2001, I heard the “fact” stated slightly differently: “95% of all businesses are no longer in business after the first 5 years and 95% of those that make it are no longer in business after 10 years.” While this seems like a trivial rewording, there is a real difference. The author went on to define “no longer in business” to include not only going out of business, but also being acquired by another firms or reorganized. I’m guessing that the SBA stats you found would also cover this distinction, as they likely track organizations by FEIN or other unique designation.

%d bloggers like this: