One-third of those would-be business creators, says Reynolds, are women. That squares with tax data -- 32.2% of all proprietorships in 1990 were owned by women. (See chart, "The Growing Number of Self-Employed," page 7.) The number of female entrepreneurs is considerably higher today than it was in the past. Between 1979 and 1990, the number of proprietorships owned by women rose twice as fast as the number owned by men. According to estimates compiled by the National Women's Business Council, women owned 6.5 million companies in 1992, up from only 2.6 million 10 years earlier.
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Survival
The myth persists. The "fact" that "four out of five start-ups fail" continues to turn up in any number of pronouncements about the precarious state of small business. Advocates say it shows that small business needs government help. Critics retort it shows that small business can't be depended on for stable economic growth.
Unfortunately -- or maybe fortunately -- the "fact" is wrong, as researchers have discovered only in the past few years.
In 1989 Bruce Phillips (of the Small Business Administration) and Bruce Kirchhoff (of the New Jersey Institute of Technology) analyzed business records from the government's Small Business Data Base (SBDB). Their first finding: nearly 40% of new companies in the file survived six years. That was already twice as many survivors as the myth predicted. Even after eight years, the survival rate was close to 30%. (See "Who's Who in Small-Business Research," [Article link].) Rates varied by industry -- manufacturing companies, for example, typically had a higher survival rate than retailers. Size made a difference, too. The tiniest companies, and those that never added even one employee, were more likely to fail than others.
Kirchhoff scrutinized the data still further. Companies are terminated for all kinds of reasons. The owner sells out or decides to get a regular job. He or she closes one company to start another, maybe in a different industry or location. Those discontinuances are different from what we usually think of as business failures, meaning a closing in which creditors lose their money. Kirchhoff found that discontinuances where creditors don't lose money account for the vast majority of all terminations. Only about 18% of all new businesses, he discovered, end in real failure. The rest survive or are closed voluntarily.
So is that the whole story? Not yet; the research is still new. But most investigations bear out Kirchhoff's conclusions.
* Studies of Census Bureau data by several economists suggest numbers in much the same ballpark as the Phillips-Kirchhoff estimates. One research team found 40% of new manufacturing companies still alive after five years. A second team looked at a representative sample of industries and found half the companies surviving.
* Just last year Joseph W. Duncan and Douglas P. Handler of Dun & Bradstreet discovered a much higher rate of survival among companies tracked by D&B. Nearly 70% of companies formed in 1985 were still alive nine years later, reported the two economists. What's more, the smallest companies in D&B's listings had a higher survival rate than the larger ones.
* What no one knows as yet are the failure rates of the very smallest companies, the ones that never make it into D&B's listings. Sketchy evidence indicates that business mortality even in this high-risk population may be lower than expected. Paul Reynolds and Brenda Miller studied a representative sample of 550 companies started in 1984 and found that nearly four-fifths of them were still alive four years later. A survey of new companies by the National Federation of Independent Business came up with nearly identical results.
Those surveys, explains Kirchhoff, don't necessarily contradict the broad-based statistical studies. The surveys didn't ascertain whether respondents were in the same business in the same location, just whether they were still "in business." Maybe they had closed one company and started another, or maybe they had moved. Those events would have shown up in the statistics as a discontinuance.
In fact, Kirchhoff adds, that very disparity points to the essential truth contained in the new research. According to the old myth, small business was an enterprise fraught with financial peril -- didn't four out of every five fail? We know now that only a small fraction come to real grief, complete with losses to creditors. Many more survive and thrive.
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Job Generation
Give David Birch the credit. And at least some of the blame.
Back in the late 1970s, the hot economic issue had nothing to do with small business; it was whether "runaway" shops were causing job losses in the northern states and corresponding job gains in the southern states. Birch, who was affiliated with the Massachusetts Institute of Technology, figured he could answer the question with a database that tracked individual business histories. So he arranged to acquire Dun & Bradstreet's files for the years 1969 through 1976. He was the first researcher to do so. (See "Who's Who in Small-Business Research," [Article link].)
Plowing through the records, Birch found that runaways weren't really very important. But when he began analyzing which companies were adding jobs, he found a surprising correlation. Eighty percent of new jobs were coming from small companies, those with fewer than 100 employees.
