The Incredible Shrinking Failure Rate

Chart showing eight-year destiny of all small businesses formed in 1977-78.

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START-UP NEWS

You have to be kind of crazy to start a business. After all, four out of five new businesses fail within five years -- half of them in the first two years. Right? Wrong. For years all kinds of misinformation has been floating around about the failure rates of new businesses. But it turns out that small start-ups are a lot hardier than anyone suspected.

Back in 1988 two researchers studying a national database reported that far more new businesses survived than was previously thought: 40% were still in business after six years. Now one of those academics, entrepreneurship professor Bruce Kirchhoff of the New Jersey Institute of Technology, is saying even 40% is too low. By Kirchhoff's most recent estimates, more than half of all start-up companies survive in some form for eight years.

Why so much confusion? One of the best measures of national start-up activity is a Dun & Bradstreet database; however, Kirchhoff has discovered that researchers can lose track of small businesses in the database if those businesses change ownership. After adjusting for ownership changes, Kirchhoff found that, after eight years, 54% of start-ups still survive in some form: 28% have the original owners, and another 26% survive with new owners.

Kirchhoff's new numbers fit with the higher survival rates other researchers have been finding when they follow a smaller sample of start-ups closely. For example, Paul Reynolds, the Coleman entrepreneurship professor at Marquette University, has found that almost 80% of the entrepreneurs in a long-term study of start-ups are still in business six years later. If Reynolds's numbers are correct, then the conventional wisdom couldn't be more wrong: four out of five start-ups don't fail in the first five years of business.

Eight-Year Destiny of All Small Businesses Formed in 1977 and 1978 (814,000 Businesses)
Businesses surviving with ownership changes 26%

Businesses surviving with same owner 28%

Voluntary termination, without losses to creditors 28%

Failures, with losses to

creditors 18%

Source: Bruce Kirchhoff, Dynamic Capitalism, Praeger, 1994.