Urban Legend Do 90 percent of start-ups really fail to make it past their first year?
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It's a grim little statistic-and persistent, too. You know,the one about nine out of 10 start-ups failing in their first year.You've heard it, or some variation of it, from experts,research firms and databases since day one of your business'sinception. Trouble is, those statistics are more than a bit off themark. Not that starting a business is easy. But it's not quitethe suicide mission it's been made out to be.
According to Brian Headd, an economist in the SBA's Office ofAdvocacy who spearheaded a study on business closures whileworking as a Census Bureau researcher, a business closure does nota failure make. That's an important distinction, says Headd,whose findings will be published in a forthcoming article in thejournal Small Business Economics. "We're focusingso much on survival rates, but it's very possible thesebusinesses had an exit strategy," explains Headd. "Ifsomeone completes that goal, that would be a very positiveoutcome."
Using Census Bureau microdata of firms started from 1989 to 1992and tracked through 1996, Headd found, among other things, thatabout half of new employer firms survive beyond four years, andabout one-third of closed businesses were a success at closure.
That finding is what makes Headd's survey unique. Thefactors leading to survival-having ample capital and a goodeducation, for example-were in line with previous research.What's different is the idea that some entrepreneurs whoshutter their businesses don't fit neatly into the"failure" category-if they're young and had only asmall initial cash outlay, they retire or they get a job, forinstance. So what gives? The problem, as Headd sees it, is the lackof a universal methodology that tracks firms over time. "WhenI started the study, every other day a reporter would call and askwhere that [nine out of 10] statistic came from," says Headd."Myths don't die that easily."
Regardless, it doesn't appear entrepreneurs are taking anyof the available research too seriously. "As people thinkabout starting a business, they're not so worried about closinganymore," asserts Headd. "Even if the myth doesn't goaway, I don't know that it matters."
