While failure isn’t something any new entrepreneur or small business owner wants to even consider a possibility, for many startups it’s not only a possibility, but an eventual reality.
According to the United States Bureau of Labor Statistics, 20% of businesses will fail in their first year and 50% by year five.
Those are some pretty discouraging figures.
On the flipside though, that also means a whopping 80% of all businesses starting out every year will survive through year one. And of those businesses that make it through their first year, 62% will still be standing at the end of their fifth year. Put simply, for every business that makes it through year one, three out of five will go on to make it past the five year mark.
And for those businesses that make it through their first five years, the odds of success get even better with almost 70% of those remaining making it to 10 years.
When you look at the figures from a success standpoint rather than failure, it doesn’t look so grim does it? And these survival rates have remained consistent over time (based on the first BLS private sector survival rates data from 1994), which means that businesses continue to succeed or fail regardless of what’s going on in the economy. Even during the financial crisis of 2008, 75% of businesses started that year remained in business a year later, and only an extra 2% dropped off at year five. Survival rates are also rather similar across industries as well, so it doesn’t appear that industry factors have much to do with the success (or lack thereof) either.
Perhaps rather than looking at it from a glass half empty perspective, we should be taking a more optimistic outlook, and rather than worrying about failure, learning what we can to avoid it.
Unless of course, you’re a startup with the goal of becoming a unicorn (a company valued at $1 billion or more). Unfortunately for you, your odds of success are less than 1%.
So why do new businesses fail? According to CB Insights who analyzed over 100 self-reported startup failures, the number one reason for failure was a lack of market demand. This accounted for a huge 42% of all failures. In second place was lack of capital at 29% and interestingly, a close third at 23% was not having the right team. You can check out the full list in their top reasons for startup failure article, which includes a handy little infographic outlining each reason and the correlating percentage.
But for now, let’s consider the top three reasons: 1) not enough demand for your product, 2) running out of money and 3) not choosing the right people to build the business. All of these things seem like pretty fundamental issues that a good entrepreneur would see coming from a mile away, but it’s even for savvy entrepreneurs, it’s easy to get swept up in the idea. They believe so much in their business offering that they fall into the “if you build it, they will come” trap, convinced that once people find out about their new/better/different product or service, they’ll be lining up with their wallets open. They convince themselves that the next big investor is around the corner or that despite management issues, the product can still sell while their internal problems are being resolved.
In reality, these are major problems that could have been avoided with the right planning on the front end. In fact, you can look at all of these reasons for failure as really boiling down to one single reason: the result of poor planning. This is why business experts continuously harp on about the fundamentals of knowing your market and building a solid business plan. You simply cannot expect to succeed without either one.
Just as many businesses fail, however, and most often due to poor planning, it’s also important to note that not all business ventures end because they were a failure. In some cases, it may be a case of not successful enough versus failing. According to the 2015 Global Entrepreneurship Monitor (GEM) survey, around a third of businesses in the developmental phase across 60 countries cited unprofitability as their exit reason, and while that could mean these businesses were losing money – i.e. failing – it could also mean they simply weren’t profitable enough to bother continuing. Other reasons for discontinuance included lack of finance, sale of the business, following new opportunities or retirement, and on a small but notable scale, bureaucracy.
It bears keeping in mind that not all businesses shut down after a year, five or even ten, because they are failing. Business owners may move on to a new venture or simply decide the payoff isn’t worth the effort they’re putting into their business. Others may have made their fortune and gone off to happily travel the world in early retirement.
But for those businesses that do shut their doors due to failure, much can be learned. CB Insights offers a fantastic foray into this very topic with their recent 253 Startup Failure Post-Mortems. There are also loads of tips and information about how to build a successful startup available right here in the davidisiere.com Entrepreneur Life archives including Common Startup Mistakes to Avoid, Learning From Your Mistakes, Tips For Success and Best Business Practices.