What percentage of businesses fail?
You are told that most businesses fail. People quote failed business statistics left and right, but the numbers are all over the place.
First of all, let’s consider a few questions about failing businesses:
- What time frame are we talking about? Are we referring to businesses failing within the first year, or the first two years, or 5 or 10 years? The failure rate among businesses is very different, depending on how long they have been in business.
- Does fail mean the business no longer exists or that it exists in a different form? For example, how do we count a business that was merged with another business? Is that business a failed business? What if the business owner retires and closes the business down. Does that count as a failed business?
- Are we looking at failure rates based on an industry? Do we get an accurate number if we lump all businesses under one umbrella?
I have read an article in Fortune Magazine that stated that 9 out of 10 startups fail, but where do they get their numbers from? There is no source for this claim, so can you believe it?
The U.S. Census Bureau reports that 400,000 new businesses are started every year in the USA, but 470,000 are dying.
Does this mean that more businesses are dying than businesses are starting?
Wow. That is a scary number. It is also a bit strange to have more businesses fail than businesses started.
Does that mean that all businesses that started fail?
I hope not.
“More than one-third of businesses today will not survive the next 10 years”. John Chambers Cisco’s CEO of 20 years
There is a recent Harvard University study done by Shikhar Ghosh that claims that three out of every four venture-backed firms fail.
According to the U.S. Bureau of Labor Statistics, about 50% of all new businesses survive 5 years or more, and about one-third survive 10-years or more.
This is an interesting statistic because it shows you that a more mature business has a better chance to survive.
According to the Small Business Administration – The SBA – close to 66% of small businesses will survive their first 2 years. What that means is that only about one-third of total businesses will fail during the first 2 years. The SBA also tells you that about 50% of businesses fail during the first year in business.
This is a much better number than the 9 out of 10 failures that some claim.
Another very important thing to consider that a closed business doesn’t mean that the business has failed. For example, the business owner might retire one day and shut down the business. Or, an entrepreneur could get sick or die.
I don’t think we should treat closing a business with a failing business.
Regardless of who you believe when you start a business there is a good chance that you will fail. Your job as an entrepreneur is to maximize your chances to succeed in business.
While you get inconsistent numbers on what percentage of businesses fail, you can do a lot to prevent your own business from failing.
Before you start a business consider the reasons businesses fail.
- You can’t pay your bills. When you run out of cash your business has failed. You can make profit predictions all day long, but the only thing that helps you pay your bills is cash. If you ever do business with large companies, you will find that many of them are slow to pay. I mean it’s not unusual for a large company to take 4-6 months to pay. They are masters at controlling their cash flow. Learn from them.
- You are offering something people are not willing to pay for. This one is easy, but so many miss it. Especially, those who end up creating a product or build software without confirming with the market that there is a demand.
- Failing to attract paying customers in a cost effective way. You might have a product people are willing to pay for, but you can’t figure out a way to market it in a cost effective way. If it costs you more money to get a new customer than you can afford you don’t have a business.
- You don’t have the skills to manage your business and you are not willing to learn. No one is a born entrepreneur. Entrepreneurs who succeed are fast learners. Learn or your business will fail.
- Unable to build a winning team. When you start out, there is a good chance that you have to do everything, but you will only build a business if you can build a team around you.
- Unable to create systems. If you look at a successful business, it runs on systems. It doesn’t rely on an all knowing business founder. There are systems within the business that enable the company to scale and grow.
Of course, there are many more reasons a company can fail, but I wanted to list just a few.
In the comments section below, share what you think is the reason so many businesses fail.
photo credit: zero percent box
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