80 Percent of Companies Won’t Fail Within 5 Years

Have you heard the “fact” about entrepreneurs, it’s called: “Within 5 years, more than 80 percent of them will fail”. If you google for that sentence, you’ll find plenty of sources that keep mentioning this as a solid fact. Have you ever considered that it might not be true, or have you accepted that as “researched fact” since people keep telling “researches indicate so” and “everybody knows that”?

I wrote about questioning authority earlier, and I think the lessons in that post are worth keeping in mind. I was reading book called Entrepreneurial Marketing (by Bjerke and Holtman, 2002) I discovered quite interesting study results.

Let me quote the book Entrepreneurial Marketing. They talk about “exit rates” rather than “failure rates”, since a firm can exit an economy for all sorts of statistical reasons without actually failing. For instance, a firm that is acquired by another firm is normally counted as one ‘exit’. Bjerke and Holtman give some figures about the survival rate of start-up companies. I believe these figures come from USA, Japan, Australia, Hong Kong and Indonesia. Their rough indications were:

  • 20-30% of start-up companies will survive more than 8 years
  • 50 percent will survive about 5 years
  • 70 percent will survive 3 years
  • 85 percent will survive the first year

50 percent will survive about 5 years? What happened to the “well-known fact” that “80 percent of companies will fail within 5 years”?

If you think about the statement: “80 percent of companies will fail” you can see some problems with it. First of all: it says “companies”. That suggests it takes into account all the companies in the world, all the industries. If you think about that bit more, could you see that perhaps “florist companies”, “IT companies” and “car seller companies” might have a bit different survival rate? Or is it so that in all companies, there’s no difference in survival rates? I doubt that. You can also think about the “80%”. That’s quite a rough number. Basically one could think that what if the number is 75% or 85%. What does this tell us? There’s tens of millions small businesses in the world. A 10 percent unit difference in these numbers would mean millions start-up companies. That’s quite a big number to make rough statements about survival rates. Yet people still keep us telling how 80% of companies will fail after 5 years. Why?

Don’t believe facts just because some authority tells you about them

What I’m trying to say here is simply that we shouldn’t believe every single ‘fact’ right away. Some “well-known facts” might be rough statements that are far from being true. I would also like to say that it’s not really necessary to question everything all the time. Sometimes it’s pointless to argue about some statements, since sometimes it just makes things more difficult.

For example, I think there would be no point for me trying to convince anyone that “80 percent of companies will fail within 50 years” is not true (any more than I just did). I think that the meaning behind that statement is “most of the start-up companies won’t be here much longer than 5 years”. That’s possibly quite accurate statement. I don’t think there’s so much harm done by saying that statement. I see no point questioning it more than I just did.

I simply rest my case by saying that statements that aren’t backed up by research findings (with specific authors, documents etc.) are not necessarily correct. Even if they point to some research articles, the credibility of those documents might need to be verified to ensure that the information is correct.

80 percent of companies won’t fail within 5 years just because some authority says so.

16 thoughts on “80 Percent of Companies Won’t Fail Within 5 Years

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  3. Wanda Grindstaff

    Thanks for a fabulous article. I have been dispelling this myth for years. It never made sense that if so many failed, why did I personally know so many who had not failed? I also appreciate the comment about the definition of failing. Many entrepreneurs start a business to achieve a certain goal and when that goal is reached (i.e. retirement…etc) then they close the business. That is not failure, but success.

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  8. SasQ

    Juuso: “First of all: it says ‘companies’. That suggests it takes into account all the companies in the world, all the industries. If you think about that bit more, could you see that perhaps ‘florist companies’, ‘IT companies’ and ‘car seller companies’ might have a bit different survival rate?”
    In the NLP this is called “generalization”, and is a kind of “information hiding” technique ;)
    Juuso: “You can also think about the “80%”. That’s quite a rough number.”
    Yees, and it’s another kind of “information hiding” ;)
    It’s said that “80% of people believe in something if there is some statistical data in it” ;)
    I know quite funny example of laying statistics, which annoys me in one commercial ;-J Some company producing well known yoggurt says in it, that they’ve made research at a group of +- 200 children in some Polish schools [they aren't in my city, but well.. maybe they've been in others ;-J]. Every student ate their yoggurt for a week or two ;-J After that they’ve probed those children and they say that it founds out that for ~80% of them their health state was good ;J
    I’m listening to this and think to myself that it’s good that only 20% of them have suffered from this yoggurt :D
    Well, unfortunatelly not everyone knows how a trustful research should be performed, and it have to be a control group who don’t eat that yoggurt at the same time, and that it’s good to have other group who’s eating placebo, etc., so, the average [hehe :D] Kowalski eat that crap, and their yoggurt too ;-P

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  9. Juuso - Game Producer Post author

    @Jake: Sounds good.
    @Scott, as said: the researchers I mention talk about ‘exit rates’ – but the old “wisdom” about “80% failing” might not take that into account. Restaurant business is pretty good example about exit plans. Good point.

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  10. Scott Meade

    Great research – thanks. The other aspect of these numbers I keep seeing is what is the definition of “fail”? How do researchers know what the plans were for the company? I know of several companies that have exit plans. When they see the market changing or other opportuniitie arise, they fold and move on. This is especially prevelent in the restaurant and club business where being “new” has so much value that new businesses spring up all the time and then close down as planned to make room for the next new venture.

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  12. Jake Birkett

    Good analysis of the stats thanks. Another factoid you always hear is that humans only use 10% of their brain. Well although you may know a few people who this seems true for ;-) MRI scans show that actually most of the brain is in fact used!

    Well my current IT consultancy company is 4 years+ and going strong. Last company I built has had a 10 year anniversary but I’ve exited from it to persue my current company.

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  13. Juuso - Game Producer Post author

    You aren’t messing with me :) Your point is very valid and I already thought that. The only thing that makes Bjerke and Holtman more credible is that their book bit more ‘scientific’ and they actually mention their sources. Both are professors. While that alone doesn’t prove anything it still means that universities have bigger chances messing their studies/books if they choose to write plain crap :)

    I haven’t checked the original study, so I don’t know how credible these findings are in the end, but I believe them enough to not to believe “80 percent” statement.

    Btw – your site has so nice folder graphics images near those categories. Can I steal them?

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  14. Pete Aldin

    So does that mean we shouldn’t believe Bjerke and Holtman? … Sorry, just messin’ with ya.

    I actually really appreciate this post, because that myth puts so much pressure on small businesses like mine. Thanks for doing the research!

    Reply

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