Formation, growth and survival; Small firm dynamics in the U.S. Economy

Abstract

“Four out of five new firms fail within the first five years.” This statement has been made so many times that most people believe it is true. But it isn't. In fact, using a relatively new data source developed by the U.S. Small Business Administration, we found that on the average, 39.8 percent of new firms survive six or more years. This is equivalent to a failure rate of three out of five, substantially lower than popularly believed.

Survival rates vary by industry with manufacturing having the greatest (46.9 percent) and construction the smallest (35.3 percent). More important, however, is the discovery that survival rates more than double for firms that grow. Even a small amount of growth boosts the average survival rate to 66.3 percent; that is two out of three growing firms survive. The earlier in the life of the business that growth occurs, the higher the chance of survival.

But, most firms do not grow in the first four years. On average, only ten percent of firms show growth in the first four years. By the sixth year, however, 34.3 percent of the firms show growth and over fifty percent show growth within eight years.

To put the old adage to rest, two out of five new firms survive at least six years and over half of the survivors grow.