J. Timothy King’s Blog

How Many New Businesses Fail Their Way to Success?

In a recent thread on the Extreme Programming email list on Yahoo! Groups, someone pointed out that XP projects sometimes fail, in that they are canceled. But they don’t go on for a long time, all lights green, and then fail to deliver.

That got me to thinking about the oft-cited myth that 80% of new businesses fail.

Jeff Cornwall, for example, challenges the myth that most businesses fail. He writes:

There has never been a study that shows this high a failure rate — ever. Some studies using flawed data showed as high as 60%, but they count a business that is sold as a “failure”. If the company no longer existed, it was counted in the failure column. Now with better data the studies indicate 40-50%. And remember, with training and education these failure rates drop to 15-25% in other surveys.

Similarly, an article about business myths at Entrepreneur.com noted:

The small-business failure legend purports to show that half of startups fold in the first year and 80 percent to 90 percent succumb after five years. But nobody seems to know where this stat originated. In fact, several well-documented studies indicate that starting a small business offers a much more reasonable chance of success. For instance, the SBA, using U.S. Census Bureau data, reports that almost half of new firms with at least one employee survive beyond four years.

This urban legend also suggests that businesses that closed were all failures. But the SBA, using another set of Census data, says a third of new businesses that closed in their early years were financially successful when they shut down. Jeff Williams, a business startup trainer in Arlington Heights, Illinois, says small businesses close for many reasons, and financial failure is not the main one.

“When I was researching my business concept, I interviewed owners of 100 businesses that had closed,” says Williams. “I found that three-quarters were nowhere close to failing financially. They closed because of highly personal reasons, such as a health crisis, or they just woke up one day and [realized they] didn’t enjoy it any longer.”

This brings up another question, though. Let’s take those 15-25% of entrepreneurs who got training and education and failed anyway. How many of them failed fast? That is, how many went into the business as an experiment? Maybe they knew how to measure the business’s performance and simply got out because they determined the experiment to have failed. Should we actually consider this a “business failure”?

A year or so ago I was talking about blog marketing with a colleague. I asked, “How can you tell whether a blog idea will take off?” He said, “You just try it.” That’s not only true of blogs. We live in the days of Internet commerce. In numerous niches, you can start a business for the cost of a website. Frequently, the best way to tell whether there’s a business there is just to try it. It may fail. And that’s okay. It was only an experiment. You risked less just starting the business than you would have spent on focus groups. On the other hand, if it succeeds, then you can grow it, invest more money in it.

This kind of failure doesn’t actually sound like a “failure” to me. It sounds like a learning opportunity. It is the price of success. The next time someone tells me, “Most new businesses fail,” maybe I should retort, “Yeah, but how many of them never saw it coming?”

-TimK