Urban legend: do 90 percent of start-ups really fail to make it past their first year?

Entrepreneur, August, 2003 by Karen E. Spaeder

IT'S A GRIM LITTLE STATIStic--and persistent, too. You know, the one about nine out of 10 start-ups failing in their first year. You've heard it, or some variation of it, from experts, research firms and databases since day one of your business's inception. Trouble is, those statistics are more than a bit off the mark. Not that starting a business is easy But it's not quite the suicide mission it's been made out to be.

According to Brian Headd, an economist in the SBA's Office of Advocacy who spearheaded a study on business closures while working as a Census Bureau researcher, a business closure does not a failure make. That's an important distinction, says Headd, whose findings will be published in a forthcoming article in the journal Small Business Economics. "We're focusing so much on survival rates, but it's very possible these businesses had an exit strategy," explains Headd. "If someone completes that goal, that would be a very positive outcome."

Using Census Bureau microdata of firms started from 1989 to 1992 and tracked through 1996, Headd found, among other things, that about half of new employer firms survive beyond four years, and about one-third of closed businesses were a success at closure.

That finding is what makes Headd's survey unique. The factors leading to survival--having ample capital and a good education, for example--were in line with previous research. What's different is the idea that some entrepreneurs who shutter their businesses don't fit neatly into the "failure" category--if they're young and had only a small initial cash outlay, they retire or they get a job, for instance. So what gives? The problem, as Headd sees it, is the lack of a universal methodology that tracks firms over time. "When I started the study, every other day a reporter would call and ask where that [nine out of 10] statistic came from," says Headd. "Myths don't die that easily."

Regardless, it doesn't appear entrepreneurs are taking any of the available research too seriously. "As people think about starting a business, they're not so worried about closing anymore," asserts Headd. "Even if the myth doesn't go away, I don't know that it matters."