A refreshingly objective perspective on what it takes for startups and small businesses to make it and the percentage that actually do.
If you plan to make it on your own, you'll inevitably wonder about the odds of success. Unfortunately, there are all sorts of statistics floating around that, even if they’re true, are usually taken out of context to create a buzz or undue hype.
Luckily, I have no skin in this game. I just thought it might be helpful to provide would-be startup founders and small business owners a little objective, qualitative and, if possible, quantitative analysis that sheds some light on the risks they will inevitably have to take.
First of all, none of the successful founders, CEOs and VCs I’ve worked with over the decades have ever given me a decent argument for disputing the common doctrine that roughly one in 10 startups makes it. Having been in this game a long, long time, that always seemed like a pretty accurate rule of thumb.
Last year Y Combinator’s Paul Graham revealed that, over the five years since his incubator program began, 37 of the 511 companies have sold for or are valued at $40 million or more. I know $40 million seems like a lot, but for venture-backed startups that include the likes of Dropbox and Airbnb, it’s actually not. In any case, that’s a 7 percent success rate.
While many of those companies still have room to run, when you consider that Y Combinator only admits a small fraction of applicants (its acceptance rate has been pegged at 3-5 percent) and it probably does have a reasonable “ability to pick winners,” as Henry Blodget correctly suggests, the 10 percent rule starts to look downright optimistic.
Nevertheless, I always wondered why that didn’t seem to jive with U.S. Census and Bureau of Labor Statistics data that indicate only about half of all small businesses fail within the first five years. While an optimist may see that glass as half full, that, as it turns out, would be a big mistake.
Truth is, just because a business doesn’t fail doesn’t mean it actually pays the bills and makes money.
Related: Why Stressed-Out Control Freaks Make Insanely Great Entrepreneurs
Crunching U.S. Census and survey data The National Federation of Independent Business (NFIB) estimates that 39 percent of all small businesses make a profit over their lifetime. About 30 percent break even and another 30 percent lose money. Moreover, small business owners have personal bills, too. They have to pay for housing, transportation, insurance and energy. They have to put food on the table. So if the business breaks even over its lifetime, that probably doesn’t cut it.
I don’t know what percentage of companies that make money also cover all their personal bills but I think half would be a pretty reasonable guess. And the percentage that pay the bills and provide for some reasonable level of comfort in retirement might be roughly half again. Since the latter is how I define business success, that leaves us with about a 10 percent success rate.
Yes, I know that’s a lot of arm waving but since I actually have some expertise in this area and it does jive with the observed 10 percent success rate for venture-backed startups, I think it’s a pretty darn good number to use in your financial planning. Besides, it’s the best I can do on short notice.
Now, here’s where things get interesting. The obvious question to ask is, what makes the difference between the 10 percent that make it and the 90 percent that don’t? If you ask 10 self-proclaimed experts on the subject, you’ll probably get 10 different answers … and they’d probably all be wrong. It really isn’t complicated and the answer is more black and white than you might think.
You might become one of the 10 percent if you …
1. Come up with a truly differentiated product for a large and growing market that, most importantly, has a value proposition that customers are willing to pay for. If not, you will not gain or maintain market share.
2. Love what you do and have no problem working your tail off day in, day out for years and years, focusing on that and not much else.
3. Actually know what you’re doing, i.e., have solid knowledge and -- better yet --experience, not just in your particular field but also in the basics of finance and running a business.
4. Are a good manager who actually knows what that means. In case you don’t, it means you can develop and execute a plan that gets the job done and delivers products and services on time and on budget that excite your customers.
5. Are an effective leader who understands people. Motivating others is all about building real relationships with real people in the real world. Customers, employees, investors and vendors are all people. That’s what business is all about.
6. Have something inside you – something to prove that drives you to do whatever it takes to win and persevere in the face of adversity, competition and obstacles that every business owner faces.
7. Make smart decisions based on solid information from expert sources and your own intuition, not on popular wisdom or feel-good nonsense.
8. Have the courage and the guts to take big risks, challenge the status quo, face the truth and do the right thing even when it’s the hard thing to do.
If that seems like a lot for someone just starting out, you’re right, it is. While everyone loves to talk about business wunderkinds like Richard Branson and Bill Gates, the truth is the vast majority of successful business leaders had careers in the corporate world that gave them the experience, knowledge and skills to make it on their own.
Personally, I think those who have what it takes will come out on top no matter what they decide to do. If you think you’ve got what it takes to make it big on your own, then I say take all this with as much salt as you like and remember the immortal words of Han Solo from The Empire Strikes Back, who said, “Never tell me the odds.”
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