Studies show that more than one individual starts 50 to 70 percent of all new firms.

Starting a business is a lot harder than most people think. Rarely is a business so in tune with its niche that it can float along with minimal effort. But why do so many businesses fail? For that matter, how many of them actually do fail? The reasons run deep, but here is what you should know before starting your own business.

Key Takeaways

• The Small Business Administration (SBA) defines a "small" business as one with 500 employees or less.
• As of March 2021, only 80% of startups survived after one year.
• According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry.
• Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.

How Many New Businesses Fail?

The Small Business Administration (SBA) defines a small business as an operation with fewer than 500 employees. That means there are a lot of businesses out there that are technically “small” even though they seem very large. These small businesses, as per the definition, make up 47.1% (latest information as of 2017) of the working population in the U.S., so their growth and success are vital to the U.S. economy.

There are currently 31.7 million small businesses in the United States, which make up 99.9% of all U.S. businesses. Many small businesses start up every month but the failure rate is high. As of 2021, 20% failed in the first year, 50% within five years, and 65% within 10 years.

Given the number of businesses that start up, why do such a high percentage of them fail?

Reasons for Failing

If you poll former business owners, you will get a wide variety of reasons as to why their businesses failed. 

Money Ran Out: This widely given reason doesn’t really explain why a business failed. The money ran out because it stopped coming in, so why did the cash flow dry up? Was it due to poorly managed costs or because sales weren't high enough? Money running out also relates to an inability to obtain financing or further financing needed to sustain a business, especially in the early days, until a business can start generating profits.

Wrong Market: Too many people try to start a business targeting everyone as their demographic. This doesn’t work out well. Next, they try to target everyone in their town. Again, too broad. The more narrowly defined your niche is, the easier it will be to market to the right audience. 

Lack of Research: You have to know what your customers want. Too many would-be entrepreneurs go into the market thinking they have a great service or product to offer, but they fail to realize that nobody wants that service or product. By doing your homework and researching your market, you will know exactly how to meet your potential customers’ needs.

The Small Business Administration considers a business a startup when it hires at least one employee.

Bad Partnership: Often, when starting a business, a partner is needed. One of you is an expert in one area, and the other is an expert in another one. Your ideas for the company will conflict, and without a clear resolution, it starts internal strife. You work harder and your partner works less, but your partner thinks they are working harder than you. Ultimately, the business dissolves because the partnership didn’t work. By having a clear business plan that lays out the duties of each partner, you can avoid most conflicts before they even arise.

Bad Marketing: It could be said that a business boils down to two aspects: marketing and bookkeeping. If you excel at both, it doesn’t matter what you are selling or offering because someone will buy it. The sad truth is that most entrepreneurs know their craft and little else. Instead of fumbling through your marketing campaign, hire out that aspect of your business. It costs money, but if done right, it will bring in much more than what you spent.

Not an Expert: Too many entrepreneurs start their business because they need a job. They have a vague idea of what they are doing, and they think that because they’re better than their peers, they should make a living doing it. The sad truth is that without business skills and real expertise, these entrepreneurs are destined to struggle.

How to Avoid Failing

It seems that most businesses are destined for failure. But there are key points to not becoming one of the 20% that fails right off the bat.

Set Goals: Know exactly where you need to be and where you want to be. Without a goal, you’re just wandering aimlessly.

Research: Know everything about your market. Know what customers want. Know that they will pay $9 but not $10. Know their incomes, their desires, and what makes them tick. The more you know, the more you can pitch to them.

Love Your Work: If you don’t love what you do, it will show. You must be passionate about your business, or it will just be a job.

Don’t Quit: No matter how great of a business you have, you are going to have downtimes. There will be periods when things are dragging along and you question your decision to embark on this path. This is a time to put in extra hours, press harder, and make it work.

The Bottom Line

Many startups fail within the early years, indicating that many things need to go right for a business to succeed. Fortunately, you can be one of the 80% that thrive in the first year. To do this, you need to follow the tips outlined above, and, most importantly, you have to test your idea, do your homework, and make sure it will work before you jump in with both feet.

Correction-May 11, 2022: This article previously misstated the percentage of business failures throughout the years.

Do Small firms employ 90% of the US workforce?

Is a chart that depicts the most important skills that are needed and where skills gaps exist?

Is one of the most important consistent predictors of future entrepreneurial performance?

Is a person who is in business for themselves works on their own time with their own tools and equipment and performs services for a number of different clients?