Startup failures or business closures?

The Wall Street Journal has a Q&A site for budding entrepreneurs that sometimes has questions and answers worth noting. Yesterday, a woman with a new business plan asked the question: “Why is the failure rate of startups so high?” Clearly a smart woman looking to learn from the mistakes of others in launching her business. Here is another person asking the same question. And another. It’s apparently a popular question.

The WSJ staff reporter who answered the questions made a point that we don’t often think about when we hear stats like “50% of businesses fail within 4 years.” Her point was: when you dig down and read most of the studies that claim these types of failure rates, you often find that they include business closures as well (e.g., owner retirements, businesses sold and consumed by other businesses). Business closures are not always failures, so the numbers are not always pure.

In addition to that interesting point, she went on to cite a mid-90s study by University of Texas and Harvard University that found:

  1. 38.5% of owners said they failed due to factors external to the business — those presumably not under direct control of the owner. Is it a coincidence that most owners pointed this out?
  2. 28% of owners said financing difficulties caused the business to fail. I would venture to guess that there is overlap between this point and #1, but it wasn’t separated out.
  3. 27.1% of owners called out factors internal to the business were to blame — those factors that the owner could impact to some degree.

Although the journalist cites a few other studies, the results are similar. The lesson? Manage external risks, but make sure you keep your own house tidy at the same time.

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(photo courtesy of Jasoon)

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