90% of businesses fail in the first two years. True or false?

by Derek Potocki on 02/12/2011 · 8 comments

Have you heard people tell you that 9 out of 10 or most businesses fail within the first 2 years?

This is pretty fearful statistics. But where does it come from? Apparently from chicken littles, because I’m going to show you completely different numbers. And I hope they will become your new weapon in dealing with all the high priests of failed business myth.

Let’s look at the graph below:

I’ve made the graph based on three separate studies. The three separate studies show three business survival rates after 2 years of operation. The average number is 40%. So the business failure rate is actually  60% not 90%.

But wait, there is more.

Check the reasons why businesses have closed:

OK. Here it gets interesting:
3.4% closed due to bankruptcy. Almost 18% who closed their doors closed to realize profit.

Now, I don’t know about you, but all these numbers are far from 90% failure ratio that popular “business” books or blogs propagate.
Maybe it’s an ego thing. To cultivate the myth of entrepreneur as a hero carrying the world on his shoulders. Maybe it’s time to look at the real numbers, and go about our life and business with a more accurate view of reality.
Or perhaps, we, entrepreneurs will cling to that 90% failure ratio forever despite of the numbers. Because if we succeed we will tell our children.

“See Johnny, daddy succeeded in business against all odds”.

And little Johnny will look up to daddy and will see an unbreakable hero, who never gave up even when the competition kept delivering thousands of blows.

“I want to be like you daddy”.

That day a new entrepreneur was born.

♣♣♣

References for fact checking junkies:

1. Main article by David Maloney http://ezinearticles.com/?Small-Business-Failure-Rate—9-Out-of-10?&id=5089437
 
2. Study 1: Shane, S in the study ‘Startup Failure Rates – The Real Numbers’, 2008 http://smallbiztrends.com/2008/04/startup-failure-rates.html
3. Study 2: Headd, B in the study ‘Redefining Business Success: Distinguishing Between Closure and Failure’, 2002 http://www.springerlink.com/content/u5218354gk84k205/
 
4. Study 3: Phillips, B. D., and B. A. Kirchoff (1989). “Formation, Growth and Survival: Small Firm Dynamics in the U.S. Economy,” Small Business Economics 1, 65-74. http://grips-public.mediactive.fr/knowledge_base/view/483/formation-growth-and-survival-small-firm-dynamics-in-the-u-s-economy/
 
5. Do small businesses have high failure rates? Evidence from Australian retailers. http://www.allbusiness.com/buying-exiting-businesses/exiting-a-business/587648-1.html

♣♣♣

Go ahead and start a business. Statistical odds are 50-50 or even better that you will succeed. Choose a market carefully and pull the trigger. If you don’t start a business the odds of success are: BIG AND UGLY ZERO! Business and selling brings money. Money can help you with your big goals.

And show me some love and Tweet and/or Share my post and write comments if you are in writing mood:). More importantly, get my free e-book, that will show you how you can write your life into a beautiful symphony. “Master of life: living without regrets”. Sounds good to you? It sounds good to me. Get the e-book to take control.

Derek

{ 7 comments… read them below or add one }

Robert Dempsey February 12, 2011 at 7:39 PM

Interesting stats and great to see the reasons behind the closings – you NEVER see that, which really makes the stats shady at best. The stats I heard are 50% failure each year for 5 years. So by the end of 5 years only a small fraction of those that were started 5 years past are still going.

That’s us! Keep rockin it man fantastic post.
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Derek Potocki February 12, 2011 at 9:34 PM

What’s up Robert,
Yeah, good catch, the stats look shady once you start digging deeper into data. The point is that closing a business is not always a sign of failure. Sometimes an owner will close it to pursue bigger and better things.
Of course, personal power factor, not stats, is the name of the game. Even if everybody else goes down, the smartest business owners will always create wealth.
That’s us:)
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John Brzezinski February 13, 2011 at 6:59 PM

Hi Derek, I’m not sure where the 9 out of 10 came from. I’ve generally understood the same as your friend Robert. i.e. about half are still in business at the five years. I did some fact checking too. The U.S. Small Business Administration cites these stats for 2088: * There were 627,200 new businesses, 595,600 business closures and 43,546 bankruptcies. * Seven out of 10 new employer firms survive at least two years, and about half survive five years. * Findings do not differ greatly across industry sectors. So it’s not so bleak. Although I must make the observation that many “businesses” are marginal, not making a profit, or are more accurately described as a hobby.

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John Brzezinski February 13, 2011 at 7:00 PM

Let’s change the date of those stats to 2008.

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Derek Potocki February 14, 2011 at 7:16 PM

Hi John,
First of all, thank you for your input. It is not that bleak at all.
My post was a response to all that chicken littles info found everywhere.
For example check these (just random Google search). These people perpetuate the myth of 9 out of 10 business failure rate:
1. http://www.gardnerbusiness.com/failures.htm
2. http://www.articlesbase.com/business-ideas-articles/why-most-new-small-businesses-fail-361035.html
blah, blah, blah…
The real numbers and especially the reasons for closing a business are much different.
So, let’s get to work:)
Derek
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Joshua July 27, 2011 at 8:13 AM

Hi Derek,
It is always nice to go through some inspiring facts which can actually bring the lost spirit into us. There are always some risk factors in order to build up a new business. If we are not capable to face those challenges then we should stop thinking about our dream goals right now and better to be prepared for “looser” tag.
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Derek Potocki July 27, 2011 at 9:07 PM

Hi Joshua,
You got it. Risk and obstacles are always built in, in building a business. Staying in the trenches and fighting is much different than lying on a beach. By not going into business we are losers by default.
I know that’s judgmental, but my observations of the world lead me to such strong opinions.
Thank you for stopping bye.
Derek
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