The Somewhat Grim Statistics of Starting a New Business

The Somewhat Grim Statistics of Starting a New Business

There’s a reason people’s eyes tend to glaze over when someone dives into a long sermon about their new startup.

When you start a business, the odds just aren’t in your favor — and the evidence is everywhere. Spend about fifteen minutes on the internet reading about starting a business and no one would blame you if you suddenly decided it wasn’t such a great idea after all.

Not every statistic is discouraging, but you must be aware of your chances of success before you devote time, money, and a lot of energy to opening and running your new venture. Even if you’re just selling homemade crafts on Etsy, it’s best to keep your expectations low, your hopes high, and to prepare yourself for a lot of work, a lot of setbacks, and a lot of compromises.

Remember: Just because you have a great idea doesn’t mean it will be a success. You can’t control outside factors like the market, your competition, the economy, and the steady and unrelenting pace of technological disruption.

All you can do is make decisions based on the best evidence. And even if you devote every hour of your life to your business, there’s still no guarantee that you’ll succeed.

This is not an attempt to dissuade you from starting a business; there is some good news, after all. We just want to put arm you with the information you’ll need for your journey. The data presented here will help you reduce risk when you can and hopefully make better decisions.

First, the Good News

The good news is that you stand on a precipice where many have stood before you.

By starting a business, you’re engaging in one of the greatest traditions in the history of free society. People respect business owners because they create new opportunities for others and they contribute to their communities, both in terms of culture and wealth. Most businesses start small and never get big, but even those that remain small can become cornerstones of their local communities.

Small and new businesses also contribute a great deal to the national economy. According to the Small Business Administration (SBA), small businesses generate about 44% of U.S. economic activity. That’s a decent-sized chunk of the pie when you consider the shares some giant companies have in their markets. Amazon maintained 47% of all retail ecommerce sales in 2019. Not everyone gets to be Jeff Bezos.

Most counties and states, as well as the federal government, want to encourage people to start businesses, so there are a lot of benefits available to new entrepreneurs:

  • SBA-guaranteed loans and grants
  • Free advice from small business centers
  • Events at your local chamber of commerce
  • Possible tax write-offs and advantages (such as pass-through income)
  • Easy ways to incorporate and organize

Small businesses employ almost half of the country’s workforce and comprise 99.7% of firms with paid employees.

Thanks, entrepreneurs!

Now, are you ready for the bad news?

Most New Businesses Fail (Eventually)

One of the most frequently cited statistics of the past few decades states that half of new businesses fail during their first year. Some pessimistic doomsayers have even cited higher percentages. In 2014, Fortune Magazine reported that 90% of startups fail, which is a grim statistic indeed.

But according to the SBA and the Bureau of Labor Statistics (BLS), these numbers aren’t quite right when you look at them in context.

SBA statistics suggest that about 80% of new businesses survive past their first year of operation. This number has stayed pretty consistent since the ‘90s. It didn’t even change through recessions and other major economic events.

Unfortunately, the chances of your business failing only go up year after year:

(Source: Bureau of Labor Statistics)

That’s right: About half of all businesses don’t make it past 5 years, around 70% of businesses fail after 10 years, and about 80% of businesses fail eventually. Ouch.

The BLS doesn’t leave much room for doubt in this area, either, literally stating, “New business establishments make an important contribution to the economy; however, it is inevitable that some of these establishments will eventually fail. The BED [Business Employment Dynamics] age series tracks cohorts of new business establishments to measure how many survive from year to year[...] Survival rates follow a similar path, regardless of the birth year.”

Naturally, businesses tend to “die” more often when the economy is in recession and tend to be “born” more often when the going is good. The numbers also vary by industry. There’s a reason the pizza place in your town is now suddenly a hair salon, and next month it will be an organic grocery.

But economics and industry trends are just two factors. There are plenty of other reasons a business can fail.

According to a study by research and analysis firm CB Insights, most businesses fail for not just one reason, but a combination of them.

When asked to select all the factors that caused their failure, 42% of startup owners said it was because there was no market need for their product or service, while 29% failed because they ran out of cash. Other common causes of failure include not hiring the right team (23%), getting outgunned by competitors (19%), pricing and cost issues (18%), and forgetting that, yes, you do need to have a business model if you intend to sell a new product (17%).

Other causes of failure from the study include the following:

  • Creating a product that isn’t user-friendly
  • Poor marketing
  • Ignoring customers
  • Launching at the wrong time
  • Lack of focus or passion
  • Disharmony among team members and investors
  • Failed expansions
  • A lack of financing or investor interest
  • Legal problems
  • Burnout

Basically, there are a lot of things that want to kill your business. Starting a business is easy. Growing it and expanding it? That’s when things get complicated.

Most Businesses Start at Home — Many Stay There

Based on the most recent statistics from the U.S. Census Bureau, there were over 30 million business establishments in 2017, which means there were also 30 million business owners. If every one of those business owners had employed 5 people, they would have employed the entire U.S. labor force at that time.

If this doesn’t seem possible, it’s because it isn’t.

The reality is that most businesses don’t have any employees at all. Only about 7.75 million U.S. businesses had employees on their rosters in 2017. The rest of those businesses represented self-employed people, many of whom work out of their own homes.

One of the most frequently cited studies about this phenomenon is the Global Entrepreneurship Monitor 2012 United States Report by Babson and Baruch Colleges, which found that 69% of startups start in people’s homes. The more interesting statistic from the report is that 59% of established businesses were still based in people’s homes.

That’s an old study, but high-speed internet access has only expanded since 2012 and online marketplaces have boomed. Today, you can start a home-based business with nothing but a MacBook and an internet connection.

This trend also makes sense given the high costs associated with starting a traditional brick and mortar business. In addition to startup costs, there’s rent, new technologies, employee overhead, marketing, and more.

If you’re starting your business from your living room with visions of making it big, keep in mind that you may still be running operations in your pajama pants a year or two down the line. There are ways to expand quickly, like raising capital or taking out a loan, but it all depends on your tolerance for risk.

Most Business Owners Work Way More Than 40 Hours Each Week

If you know anyone who owns a business, you don’t even need studies to verify this. But one common mistake new entrepreneurs make is assuming they’ll be able to work fewer hours because they can delegate their responsibilities to others and make their own schedules.

While this isn’t unheard of, it’s a rarity when you look at the numbers. The Bureau of Labor Statistics found that the majority of small-business owners work at least 50 hours per week, while 25% said they work more than 60.

Most Businesses Are Struggling to Retain Employees

In the 20th century, it wasn’t unheard of for someone to stay at the same company for 40 years, build themselves a nice middle-class life, then retire with a pension.

Times have changed.

Few people today expect their employers to take care of them, and fewer still are satisfied enough with their jobs to stay longer than a few years. A 2019 Deloitte survey found that this is especially true among younger employees. Forty-nine percent of Millennials say they intend to leave their current job in 2 years, and 25% of those same respondents had already left a job within the previous 2 years.

A recovering economy, an increasingly educated workforce, and a low unemployment rate have all contributed to this trend. Nothing lasts forever, but the nature of what people want from their work is changing and influencing turnover as well. Few people are happy with just a paycheck — they want opportunities for career advancement, and they want to be recognized for their ideas.

A Gallup study showed that 79% of employees leave their jobs not because they aren’t making enough money but because they aren’t being appreciated. Despite how you might feel about holding your employees’ hands and singing kumbaya, this is the new reality.

To reduce turnover, you’ll need to prioritize the following:

  • Develop a hiring process that gets the right people through your door
  • Offer attractive benefits packages
  • Provide opportunities for ongoing education and cross-training
  • Enable employees to share their ideas
  • Recognize employee excellence
  • Create company traditions and establish a set of values
  • Create flexible start and end times for workdays
  • Allow employees to work from home, if possible
  • Ensure employees understand their roles and responsibilities
  • Stand for something beyond profit

If you’re just starting your business, you probably don’t have an HR department to back you up. Start with the basics, like an employee health plan and a 401(k). Many startups offer their employees stock options to sweeten the deal and build a team atmosphere.

No One’s Going to Get Rich Quick

You may have heard stories of unicorn startups being bought up by big companies, their bright-eyed CEOs retiring early and sailing off into the sunset on their mega-yachts at the ripe old age of 34.

If you’re starting a business with the goal of getting rich quick, you aren’t going into business for the right reasons.

This isn’t to say that this doesn’t happen; it just happens so infrequently that it’s on par with winning millions on a scratch ticket or signing up your garage band with a big record label before you reach the legal drinking age.

Most studies indicate that entrepreneurs tend to make a yearly salary that’s above average, but they certainly don’t have swimming pools filled with Spanish Doubloons. American Express OPEN found that more than half of entrepreneurs paid themselves a full-time salary of $68,000 in 2017.

That’s a decent salary by most standards, but it doesn’t suggest starting a business is a direct path to Easy Street. Successful entrepreneurs tend to start businesses for other reasons, like the desire for professional freedom or the urge to fill a need in the market with a new idea.