The truth about business failure and bankruptcies

There are few topics in the entrepreneurship and SME world of research that are as much discussed as the failure rate of new businesses (what we call generally “startups”). Here’s the truth about it.

You all have heard of alarming statistics : 50% of startups die within 2 years or even 1 year, 75% within 7 years, etc … at the same time certain people advocate that these figures are completely false and do not deserve credit. I’ve heard that only 10% of startups failed the first year and that more than 50% survived over 7 years. You’ll agree with me that there is a big gap between the most positive and the most negative of those figures.

In their presentation given at the RENT XXVII conference in Vilnius, Matthijs Hammer and Nabil Khalil helped us understand where these differences come from. They used official statistics from several countries to understand what’s behind “business failure”.

Statistics varies per country

The official statistics are the following (keep them in mind for the next time someone speaks about this very sensitive topic :

• Canada : 60 % 5 year failure rate. Source : Statistique Canada (PALE)
• France: 49,5% 5 year failure rate. Source: Insee (Sine)
• Tunisia: 39 % 2 year failure rate. Source: BTS (Tunisian Solidarity Bank)
• The Netherlands: 50 % 5 year failure rate. Source: CBS (Statistics Netherlands)
• USA: 50 % 4 year failure rate. Source: U.S. Census Bureau (BITS)

The first thing you can see is that the period of reference is different. It varies between 2 years (Tunisia) and 5 years (France, Canada, The Netherlands).

Definition of business failure varies per country

The second thing that Nabil and Matthijs explained is that the very definition of “business failure” varies from one country to the other. The diversity of definition goes as far as bankruptcy, closure, exit, insolvency, discontinuity, etc…

Conclusion

Reading the above you understand that the differences in statistics come from the period of reference and the very definition of “business failure”. Bankruptcy suffers obviously no discussion as far as business failure goes. Bankruptcy is the pinnacle of failure. Yet, most firms do not exit after a bankruptcy. They can be taken over, they simply exit because no one wants to take them over (which is going to be a huge problem in the coming years with baby boomers getting retired), the one-person firms can be closed because the entrepreneur is ill, doesn’t want to continue, has found a better opportunity … you name it.

But all in all what you see is that on a 5-year horizon there is indeed some kind of commonness between all figures. It seems to be near 50%. The figure you should therefore keep in mind is that within 5 years, 50% of startups close.