The Truth About Start-ups
So you want to start a company. (Or, if you already have, perhaps you want to start another one.) You are not alone.
The latest figures suggest that Americans this year will start about 700,000 new corporations, 100,000 new partnerships, and 500,000 new sole proprietorships -- about 1.3 million new enterprises in all. In 1950, by comparison, there were only 90,000 new incorporations, very few new partnerships, and many fewer workers choosing to become self-employed.
That today there are so many more would-be company builders, however, doesn't mean it is any easier. If you are among them, you no doubt wonder what you could do (or where you should go) to maximize your chances for success. I get questions all the time from people just like you, particularly since at Cognetics I'm in the midst of starting a company myself.
Unfortunately, I can't help you prepare psychologically for the long hours, the endless frustrations, the constant ups and downs, the demands for patience and persistence, the desperate need to plan when there is no time for planning, and so forth.
But I can give you some facts about 984,000 companies in our Cognetics database that were started between 1982 and 1987 and made it through to 1987, and about the experiences of another 512,000 young companies that were started between 1978 and 1982 and tried to survive and prosper during the 1982-1987 period. Such facts as: what kinds of businesses are started most often, which ones have the greatest chance of surviving, and which ones have the greatest odds of growing significantly. I can also tell you which places tend to have the highest start-up rates, and which places tend to support growth in young companies.
Keep in mind while reading further that by each measure we ranked 236 distinct industries (the total number of industries that had at least 300 start-ups nationwide from 1978 to 1982).
It is no surprise which businesses are most frequently started (see figure 1). Bars, small stores, and repair shops always have been common avenues for entrepreneurship. The only surprise is computer and data-processing services -- an impressive newcomer at 10th out of 236. Note carefully, however, that the survival and growth rankings of the most commonly started businesses are not very high. The old adage that. "Fools rush in where angels fear to trend" seems to apply to starting businesses.
FIGURE 1 MOST FREQUENTLY STARTED BUSINESSES
Rank Type of Survival Growth
industry rank rank
1 Misc. business services 132 103
2 Eating & drinking places 161 162
3 Misc. shopping goods 159 206
4 Automotive repair shops 78 210
5 Residential construction 141 171 *
6 Machinery & equipment wholesalers 138 105
7 Real-estate operators 38 198
8 Misc. retail stores 100 169
9 Furniture & furnishing retailers 206 171 *
10 Computer & data-processing services 163 34
The businesses that people love to start don't score very well on survival or growth. (Total field for rankings is 236 businesses.)
Let's assume for a minute that survival, not spectacular growth, is your main business goal. You are tired of working for someone else and you would like to start a business that is likely to be around five years from now -- that is, you want to worry as little as possible about failure, and focus instead on leading a comfortable, stress-free life. Become a vet -- not a retired soldier but a veterinarian. Figure 2 shows that many of the most secure businesses are those that require advanced training to start -- training that serves as an effective barrier to entry. The businesses of vets, dentists, and doctors are good examples.
FIGURE 4 BUSINESSES MOST LIKELY TO SURVIVE
Rank Type of Start-up Growth
industry rank rank
1 Veterinary services 125 195
2 Funeral services 158 224
3 Dentists' offices 108 171
4 Commercial savings bank 93 1
5 Hotels & motels 27 160
6 Campground & trailer parks 166 202
7 Physicians' offices 35 166
8 Barbershops 151 221 *
9 Bowling & billiards places 118 186
10 Cash grain crops 197 221 *
Most of the businesses promising security require specialized advanced training -- a formidable barrier to entry.
Of course, degrees and training may buy you security and protection from other entrants (most high-survival companies rank low in start-up frequency), but, with the recent exception of savings banks, they do not tend to produce much growth. The average growth rankings for secure businesses are very poor.
If you want to be not only independent but rich, you must go after growth. Contrary to what you may think about the "rusting of America," 9 out of 10 of the industries with the highest odds of significant growth are in manufacturing (figure 3). But as you can also see, these are not the easiest businesses to get into -- they have low start-up rankings. Nor would they provide restful, stress-free work environments -- their survival rankings are not so good.
FIGURE 3 BUSINESSES MOST LIKELY TO GROW
Rank Type of Start-up Survival
industry rank rank
1 Commercial savings banks 93 4
2 Electronic component mfr. 102 132 *
3 Paperboard container mfr. 225 72
4 Computer & office machine mfr. 142 194
5 Misc. paper product mfr. 191 68
6 Misc. plastic product mfr. 84 132 *
7 Basic steel mfr. 215 163
8 Pharmaceutical mfr. 220 172
9 Communication equipment mfr. 139 192
10 Partition & fixture mfr. 187 107
Contrary to the 'rusting of America' myth, manufacturing businesses are the most frequent high fliers.
By this point you may be thinking that selecting a business to start is less simple than you had hoped. The businesses that seem easied to start tend to grow little -- or even to close. Those that easily survive do so because they are difficult businesses to get into. And the ones you can get rich at are hard to start and hard to keep going.
We took one last cut at the data to see if there were any reasonably easy ways out, by which we mean: are there businesses that rank in the top 50 in start-up frequency and survival rate and growth likelihood? The answer is yes. There's one -- engineering and architectural services. So if you are good at designing buildings and bridges, you have much going for you. Otherwise, you will have to struggle.
Summing this up another way, you have to think carefully about what kind of business you want to start. None is likely to provide you with easy entry, security, and reward. You'll be forced to choose those characteristics that matter most to you, and then brave the absence of the others.
One thing you can do when starting your company is to locate in a place that offers a lot of support. As I mentioned earlier, starting a business is psychologically difficult. It helps to be where bankers, accountants, and financiers are used to working with start-ups, and where lots of other start-ups are around to remind you that you're not crazy.
We've observed in our data that some places are indeed much more likely than others to support the start-up and growth of young businesses -- by a factor of 8 or 10 over less hospitable locales. Figure 4 ranks places in terms of start-up rate and in terms of the odds that young companies there will grow significantly. Despite all its problems (or perhaps because of them) Texas is still a major hotbed for young growing companies, although it is certainly not alone. Conversely, our data has shown that you should think twice before starting up in many of the country's rural areas. They may be peaceful, but you would be -- for the most part -- on your own. As we'll seen in next month's column, you can do it, but it isn't easy. The figures suggest that loneliness works against, rather than on behalf of, success.
FIGURE 4 START-UP HOT SPOTS
Places with Places where start-ups
highest start-up have greatest
frequency chance of growth
1 Austin 1 Manchester-Nashua, N.H.
2 Dallas 2 Raleigh-Durham, N.C.
3 Huntsville, Ala. 3 Nashville
4 Orlando 4 Boston
5 El Paso 5 Washington, D.C.
6 Atlanta 6 S. Bend-Benton Harbor, Ind.
7 Nashville 7 Atlanta
8 San Antonio 8 Fort Wayne, Ind.
9 Charleston, S.C. 9 Orlando
10 Tampa-St. Petersburg 10 Austin
Where businesses start up often and grow fast: Austin, Orlando, Atlanta, and Nashville make both lists.
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