An optimistic entrepreneur requires a dose of reality now and then. Cold statistics like these are not intended to discourage entrepreneurs, but to encourage them to work smarter and harder.

As a new entrepreneur gearing up to start a small business or a business owner who is recently opened your doors, there is a lot of uncertainty ahead of you. Everyone whom you have told about your idea has probably (rather unhelpfully) mentioned what percentage of small businesses fail.

Whether they have given you stats that are right or wrong, you are reasonable to feel nervous. After all, opening a small business is sometimes a hard nut to crack. You cannot be sure how your product will evolve, whether you will qualify for a small business loan, or if you will even make it through the many challenges of owning a small business.

It is, therefore, helpful to actually know what percentage of small businesses fail because many do succeed. And you do not want anyone scaring you out of your dream then, the best thing you can do is have facts.

In this article, you will be able to understand some of the lesser-known reasons that some start-ups fail, while more importantly, why only a few small businesses succeed in the long run.

What Percentage of Small Businesses Fail?

Each year, millions of ambitious entrepreneurs start their new businesses. These entrepreneurs feel bright and full of hope. And plenty of small business statistics demonstrate that by the end of four years more than half of them will be gone.

The fast answer for what percentage of small businesses fail, according to data from the Bureau of Labor Statistics is that about 20 percent fail in their first year and about 50 percent of small businesses fail in their fifth year. But it is also helpful to see these statistics in terms of how many small businesses in the United States survive. According to the Bureau of Labor Statistics’ Business Employment Dynamics, here is what the survival rate looks like:-

Blog You May Like – How To Start A Vending Machine Business And Make Money

  • About 80 percent of businesses with employees will survive their first year in business. The most recent data displays that, of the small businesses that opened in March 2016, 79.8% made it to March 2017.
  • About 70 percent of businesses with employees will survive their second year in business. The recent data brings up the small businesses that opened in March of 2015, 69.2% made it to March of 2017.
  • About 50 percent of businesses with employees will survive their fifth year in business. Data demonstrate that of the small businesses that opened in March of 2012, 50.2% made it to March of 2017.
  • About 30 percent of businesses will survive their 10th year in business. The most recent data shows that of the small businesses that opened in March of 2007, 33% made it to March of 2017.

But, again, the quotable statistics which you need is that about 20 percent of small businesses fail in their first year and 50 percent of small businesses fail in their fifth year.

And these rates are consistent over time. Surprisingly, this suggests that year-over-year economic factors do not have much of an impact on how many US small businesses survive. The takeaway here is that you can pretty much bet on an 80%, 70%, 50% and 30% survival rate across one, two, five and ten years in business, respectively, no matter the year.

It is, thus, important to note that this reflects all businesses in the private sector. While the overall survival rates for small businesses do not vary much, the facts look a little different when you look at the business failure industry by industry.

Many small businesses make it past that critical period and thrive. How many make it and what industries are faring best? We have collected some start-up statistics for small businesses from a variety of sources to answer these questions.

Blog You May Like – Types of Business Entities – Their Pros and Cons and How To Choose One in 2019

Why Do Small Businesses Fail?

According to Investopedia, the four most common reasons why small businesses fail are lack of sufficient capital, poor management, inadequate business planning and over-blowing their marketing budgets (cash flow problems). But there are many more than four reasons why early-stage businesses in this country do not survive.

A CBInsights analysis of 101 start-ups polls displays the reasons why those businesses failed, according to their founders. Here were the top results:

  • 42 percent of small businesses fail because there is no market need for their services or products.
  • 29 percent failed because they ran out of cash.
  • 23 percent failed because they did not have the right team running the business.
  • 19 percent were out-competed.
  • 18 percent failed because of pricing and cost issues.
  • 17 percent failed because of a poor product offering.
  • 17 percent failed because they lacked a business model.
  • 14 percent failed because of poor marketing.
  • 14 percent failed because they ignored their customers.

Clearly, there are many reasons why small businesses fail, but a few keep coming to the top, such as capital access, cash flow, lack of demand and poor management.

Small Business Need-to-Know Statistics

Statistics for General Small Business Start-ups

69 percent of U.S. entrepreneurs start their businesses at home.

As per the analysis of the National Association of Small Business’s 2017 Economic Report, the majority of small businesses surveyed are LLCs (35 percent) followed by S-corporations (33 percent), corporations (19 percent), sole proprietorships (12 percent), and partnerships (2 percent).

Around 60 percent of people asked, “What’s the best way to learn more about entrepreneurship?” responded with “Start a company”.

Blog You May Like – The Best High Yield Business Savings Accounts Right Now

Small Business Owner Statistics

Who is starting small businesses today? Here’s a look at small business owners:

Gender

  • 73 percent are male
  • 25 percent are female

Age Range

  • 35 percent are 50-59 years old
  • 25 percent are 40-49 years old
  • 18 percent are 60-69 years old
  • 14 percent are 30-39 years old
  • 4 percent are 18-29 years old
  • 4 percent are over 70 years old

Education

  • 33 percent are High School / GED
  • 18 percent are Associates Degree
  • 29 percent are Bachelor’s Degree
  • 16 percent are Master’s Degree
  • 4 percent are Doctorate

Below are some of the common reasons and statistics for starting a small business

  • 26 percent are ready to be his/her own boss
  • 23 percent want to pursue his/her passion
  • 19 percent have the opportunity presented itself
  • 12 percent are dissatisfied with corporate America
  • 6 percent are laid off or outsourced
  • 6 percent are not ready to retire
  • 5 percent are others
  • 3 percent are life events such as divorce, death, etc.

Ethnicity

  • 71 percent are White/Caucasian
  • 11 percent are Asian/Pacific Islander
  • 7 per cent are Black/African American
  • 6 per cent are Hispanic/Latino
  • 5 percent fall in other categories

About 82 percent of successful business owners did not doubt they had the right qualifications and proper experience to run a company.

Start-up Failure Rate Statistics

Of all small businesses started in 2014:-

  • 80 percent made it to the second year (2015)
  • 60-70 per cent made it to the third year (2016)
  • 62 per cent made it to the fourth year (2017)
  • 50-60 percent made it to the fifth year (2018)

Given those numbers, a bit more than half of all start-ups actually survive to their fourth year, while the start-up failure rate at four years is about 44 percent.

Top 10 causes of small business failure:

  • No market need: 42 percent
  • Ran out of cash: 29 per cent
  • Not the right team: 23 per cent
  • Got outcompeted: 19 per cent
  • Pricing / Cost issues: 18 per cent
  • Non user-friendly product: 17 per cent
  • Product without a business model: 17 per cent
  • Poor marketing: 14 per cent
  • Ignore customers: 14 per cent
  • Product mistimed: 13 per cent

Start-up Finance Statistics

Money is an ingredient to the small business success rate. Here is a financial data of small business start-ups:

  • A third of small businesses start with less than $5,000 and 58 percent got started with less than $25,000.
  • In addition, 65 percent admits not being fully confident they had enough money to start their business and;
  • An amazing 93 percent said they calculated a potential run rate of shorter than 18 months

Looking back, the most popular small business financing methods in 2018 were:

  • 77 percent in personal funds
  • 34 percent in bank loans
  • 16 percent in borrowing from family or friends
  • 11 percent in other funding
  • 9 percent in donations from family or friends
  • 4 percent in online lenders
  • 3 percent in angel investors
  • 3 percent in venture capital
  • 2 percent in crowd-funding

About 40 percent of small businesses are profitable, 30 percent break even and 30 percent are continually losing money.

Having two founders rather than one significantly increases your odds of success as you will

  • Raise 30 percent more money.
  • Have almost 3 times the user growth.
  • Around 80 percent of businesses that fail do so because of having cash flow problems.
  • 27 percent of businesses surveyed by the NSBA claimed that they were not able to receive the funding they needed.
  • 19 percent are less likely to scale prematurely.

Fastest Growing Small Business Industries Statistics

The industries with the top number of small business start-ups in 2018 were

  • 11 percent were business services
  • 11 percent were food/restaurants and hotels
  • 10 percent were health/beauty/fitness
  • 7 percent were general retail stores
  • 6 percent were home services

Industries With The Best Start-up Statistics

The most profitable small business industries by net profit margin (NPM) are:

  • Accounting, Tax Preparation, Bookkeeping, and Payroll Services
  • Lessors of Real Estate (17.9 percent NPM).
  • Legal Services (17.4 percent NPM).
  • Management of Companies and Enterprises (16 percent NPM).
  • Activities Related to Real Estate (14.9 percent NPM).
  • Offices of Dentists (14.8 percent NPM).
  • Offices of Real Estate Agents and Brokers (14.3 percent NPM).
  • Non-metallic Mineral Mining and Quarrying (13.2% NPM).
  • Offices of Other Health Practitioners (13 percent NP).
  • Medical and Diagnostic Laboratories (12.1 percent NPM).

Blog You May Like – How To Easily Find and Pick A Business Attorney In 5 Steps

Industries With The Worst Start-up Statistics

The least profitable industries in the US by net profit margin (NPM) are:-

  • Oil and Gas Extraction at -6.9 percent NPM
  • Software Publishers at -5.1 percent NPM
  • Beverage Manufacturing at -3.7 percent NPM
  • Semiconductor and Other Electronic Component Manufacturing at -0.3 percent NPM
  • Forging and Stamping at 0.4 percent NPM
  • Farm Product Raw Material Merchant Wholesalers at 0.9 percent NPM
  • Beer, Wine and Distilled Alcoholic Beverage Merchant Wholesalers at 2.1 percent NPM
  • Petroleum and Petroleum Products Merchant Wholesalers at 2.8 percent NPM
  • Grocery Stores at 2.2 percent NPM
  • Bakeries and Tortilla Manufacturing at 2.3 percent NPM

Characteristics of Successful Start-ups

There are quite a lot of characteristics of small business start-ups that actually succeed. However, the objective here is not to list them, instead, point out a few of the most significant causes that lead to small businesses being successful.

(i) Product is Perfect for the Market

Fortune reported the top reason that start-ups fail is that they make products no one wants. A careful survey of failed start-ups shows that 42 percent of them identified the “lack of a market need for their product” as the single biggest reason for their failure.

If you are going to spend your time making a product, then spend your time making sure it is the right product for the right market.

(ii) The Entrepreneur does not Ignore Anything

A good product idea and a qualified technical team are not a guarantee of a sustainable business. One should not avoid the business process and issues of a company because it is not their job. And also it can deprive them of any future in that company.

A start-up cannot segment its responsibilities. Things are more organic in a start-up, meaning that roles and responsibilities will overlap. Small things can turn into large things. Some of the most significant components of a start-up are those pesky issues of business process, business model and scalability.

Successful entrepreneurs are aware of the fact that they must work on their business, not in their business. Getting caught up in the minutiae of presentations, phone calls, meetings and e-mails can distract the entrepreneur from the heart of the business.

(iii) Company Or A Business Grows Fast

Fast growth is what entrepreneurs want, investors need and markets want. Rapid growth is a great symbol of a great idea in a hot market. Growth takes to more growth, which takes even more growth. A start-up must not be compromised with marginal single-digit growth rates after many months of operating. If the growth does not happen after a certain amount of time, then the growth will not happen. A company that is not growing is shrinking.

The next primary reason that why start-ups fail is that they ran out of cash. Why did they run out of cash? Because they did not grow fast enough. If your start-up can grow fast, you can effectively bypass some of the biggest start-up killers, such as losing to the competition, losing customers, losing personnel and losing passion.

(iv) Team Knows How to Recover

Every start-up is backed by a team of people. The more innovative and versatile that team, the better the possibility they have of succeeding. Versatility is often viewed in a restricted sense, that of possessing more than one skill or talent.

Versatility in the start-up environment includes much more than someone’s skill set. It involves a mindset. Start-up teams must possess the capability to alter the products, adjust to different compensation plans, take up a new marketing approach, shift industries, rebrand the business, or even tear down a business and start all over again.

It is all about recovering from blows. Teams that are able to overcome together, also possess the unique trait of harmoniously working together through tough times. Start-ups business with co-founders has a higher success rate than companies with a single founder.

Having a co-founder creates a partnership. There is much more accountability, which helps you to avoid some of the pitfalls of a single charismatic leader. Plus, a co-founder will have skills that you might not possess.

Bottom Line

So, if you want to start your own business, do not let the start-up statistics above put you off. After all, you are more likely to succeed if you have failed than if you have never tried. Consider, founders of previously successful business have a 30 percent chance of success with their next venture, founders who have failed at a prior business have a 20 percent chance of succeeding versus an 18 percent chance of success for first-time entrepreneurs.

If your start-up lasts, you are lucky. You have been able to do something that 90 percent of new businesses have not been able to do. Even though there is a lot of luck involved in success stories like Google and Facebook, there are more humble reasons why other start-ups succeed. They have a product that meets a need, they do not ignore anything, they grow fast and they recover from the hard-knock start-up life.

Related post

Leave A Comment