The common wisdom has long held that four out of five new businesses fail within five years. Once again, the common wisdom is wrong, at least according to a new study by Bruce Kirchhoff, an entrepreneurship professor at Babson College, and Bruce Phillips, an economist with the Small Business Administration's Office of Advocacy. They report that 39.8% of new businesses survive at least six years. Among growing companies, moreover, the survival rate skyrockets to more than 65%.
Working from an extensive SBA database derived from the Dun's Market Identifier file, Dun & Bradstreet Corp.'s marketing database of 8.5 million companies, the researchers found the lowest survival rate (26%) among start-ups that had less than five employees at birth and then did not grow. If a small start-up added as little as one job, however, its chance of survival more than doubled. In general -- and not surprisingly -- the survival rate tended to be higher among companies that had created more jobs.
As for the companies that don't make it, Kirchoff is reluctant to call them failures, preferring the word "exits" instead. Failure, he maintains, is an inaccurate and loaded term, since a significant but unknown portion of disappearing small businesses are closed without losses by their owners, who reorganize or move on to other occupations. The distinction matters, according to Kirchhoff, because the stereotype of frequently failing small companies makes policymakers suspect of start-ups as a source of jobs.
Still, if you'd prefer to be among the surviving, rather than the exiting, you'd better hope that growth is in your future. Not that you should rush out and start hiring. Kirchhoff and Phillips don't say whether growth leads to survival, or vice versa. Maybe that will be in the next study.
START-UPS THAT MAKE IT
A. SIX-YEAR SURVIVAL RATES
Percentage of Companies Surviving
After Six Years
No 1-4 5-9 10 +
Size of Company jobs jobs jobs jobs
at Birth added added added added Overall
1 to 4 employees 26.0% 65.0% 75.6% 77.5% 37.2%
5 to 499 employees 34.1 72.4 75.3 79.2 49.2
Overall 27.5 66.3 75.5 78.4 39.8
The table shows the percentage of companies surviving six years after their founding. As you can see, the lowest survival rate (26%) was among companies that started with one to four employees and did not add any new jobs.
B. GROWTH AND SURVIVAL
Percentage of Companies Surviving After
Growth Two Years Four Years Six Years
No jobs added 70.5% 37.5% 27.5%
1-4 jobs added 92.0 80.9 66.3
The table compares the survival rates over time of no-growth and low-growth companies.