- On July 31, 2018
There’s a rather complex debate in the startup world regarding failure rates. Although they are helpful to encourage smarter strategies and harder work, these figures are often misinterpreted and taken out of context.
By joining us in this analysis, you’ll be able to process the information derived from such statistics in a way that will benefit your own business strategies.
In January 2014, Glenn Kessler wrote an article for The Washington Post in which he criticized Sen. Rand Paul (R-Ky.) for this statement:
“What he [President Obama] misunderstands is that nine out of 10 businesses fail, so nine out of 10 times, he’s going to give it to the wrong people. He gave $500 million to one of the richest men in the country to build solar panels, and we lost that money.”
The senator said these words during an interview on CNN’s “State of the Union” the day before Kessler’s article was published. His statement was a critic of former President Obama’s strategy to create jobs through the funding of new businesses.
Rand Paul specifically referred to the case of the solar-panel manufacturer Solyndra, which received a $534 million loan guarantee but unfortunately, it ceased operations. He used that example to emphasize his belief that nine times out of 10, the US government would try to boost the wrong projects.
But Kessler considered Paul’s statement “mostly false”. The Fact Checker columnist described the statistic on which the senator’s critic was based as a myth that people repeated although it made no sense at all.
The author made it clear that such a serious public statement should take into account several variables such as the time frame and the industry. He also mentioned that the sources behind failure rates should clarify their definition of “failure”. Do they refer to businesses that aren’t viable in economic terms? Or do they include projects that were successful but then merged with another enterprise?
Of course, the fact checker relied on several studies to build his argument against the “9 out of 10” statement that’s so widely accepted and shared.
He cited a chart from Website designer smallbusinessplanned.com, which puts together data from three different sources. According to the chart, half of the new businesses remain open after four years. The failure rate never gets to 90%, although it does increase over time.
Kessler cited 2012 data from The Small Business Administration, which states that “about half of all new establishments survive five years or more, and about one-third survive 10 years or more.” We checked the most recent data – June 2016– and found that the survival rate has not changed.
He added information from a study published in 1989, which revealed that 39.8% of new establishments survived six years or longer. However, the researchers noted that this rate varied among types of companies.
The journalist remarked that the meaning of the word “failure” can have a number of different interpretations. For instance, he cited a 2002 research for Small Business Economics revealing that about one–third of closed establishments did not really fail.
“It appears that many owners may have executed a planned exit strategy, closed a business without excess debt, sold a viable business, or retired from the work force,” the study says, as quoted by Kessler on The Washington Post article.
Moreover, Kessler mentioned a study by Harvard University’s Shikhar Ghosh, who demonstrated that three out of every four firms backed by venture capital fail.
Still, the fact checker highlights that only about 30% of the cases turn out to be a complete loss of the venture-capital investment, whereas the other 70% simply didn’t get to close with a full return of the initial investment. They may have closed as a result of an acquisition or initial public offering, as Kessler puts it.
All this data led him to affirm that the Senator Paul’s critique on Obama was nothing but a “fallacy”.
Let’s analyze a different point of view
A recent study by Small Biz Research shows that 9 out of 10 businesses fail “in today’s world”. In an infographic, they say that it’s also important to know the failure rates by industry. According to the study, about 60% of the new startups fail in the information industry, whereas the figure decreases by about 20 points in the industry of finance, insurance, and real estate.
The purpose of the Small Biz Research infographic is to highlight the common characteristics of startups that fail and compare them with the best practices of the new establishments that succeed. By analyzing this information, entrepreneurs can identify what they’re doing wrong and improve the right practices.
Entrepreneurs need to be persistent. But more than that, they need to create disruptive business models designed to solve existing consumer problems. The study also reveals that one of the top characteristics of startups that succeed is that they rely on experienced mentors, qualified people to guide the business from the beginning of the project development.
What do startup failure rates mean to you?
When it comes to startups, business rates can be confusing. You can only feel related to them if they address your location, industry, type of business, market… The reality of each startup is unique to its circumstances.
While optimistic failure rates boost the confidence of the entrepreneurs, pessimistic data encourages them to work harder and smarter in order to craft truly competitive innovative solutions.
The right thing to do is to pay close attention to your specific micro and macro environment factors so you can identify your opportunities and start designing, validating, and launching a market-ready business model.
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