Spiking Stereotypes About Small Firms
IN old adage holds that four out of five new small business firms fail in their first five years.
Nonsense, says Bruce Kirchhoff, professor of entrepreneurship at New Jersey Institute of Technology. He has new statistical evidence showing that no more than 18 percent fail during their first eight years. Twenty-eight percent of all start-ups survive with their original owners, 26 percent survive with a change in ownership, and 28 percent voluntarily terminate operations without losses to creditors.
Since next week has been proclaimed Small Business Week, the Kirchhoff study may get extra attention. Certainly his findings should encourage those considering launching new enterprises. It may also influence thinking at banks and other lenders where it has been long assumed that a high proportion of new firms go belly up in short order.
"The bankers are wrong," Mr. Kirchhoff says.
When Kirchhoff was chief economist at the Small Business Administration in 1980-81, the administrator of the agency used that four-out-of-five adage in a speech. Kirchhoff assigned two assistants to track down its source. They spent six weeks at it and never found one, though it was used as early as 1967 in a newspaper article.
David Birch, a lecturer at Massachusetts Institute of Technology, found a Dun & Bradstreet report from the early 1960s noting that four out of five failing businesses were small - not four out of five small businesses fail.
"Somebody flipped it," says Mr. Birch, who is president of an economics-market research firm, Cognetics Inc. in Cambridge, Mass. Since the vast majority of businesses are small, it is "a great testimony and tribute to small firms" that relatively few do fail.
Around 15,000 businesses in the US have more than 500 employees. Some 85,000 have 100 to 499 employees. Internal Revenue Service tax forms show a total of 21 million businesses in 1991, but about 75 percent of these have no employees other than their owner.
Only 5 percent of small businesses fail in good times and around 8 percent in recessionary periods, Birch says. About 50 percent of small businesses are closed five years after their founding, he says. So the remainder have closed voluntarily or changed ownership.
About 400,000 new businesses are launched each year in the US. They are the major providers of new jobs.
"All these entrepreneurs cannot be stupid," says Kirchhoff. "They look around and talk to others and realize that their chances of survival and success are far better than academic economists have estimated. It's the economists that look foolish."
Kirchhoff won an award for his research last month from the Association of Private Enterprise Educators. He says his study is the first to calculate the rate of change in ownership.
Another finding of the Kirchhoff study is that larger start-ups, with four or more employees, are twice as likely to survive for eight years. "We don't know why," he says. Further, those firms that change the product or service they provide after start-up have a better survival rate. "Smaller firms have a degree of flexibility that serves to their advantage," Kirchhoff says.
Cognetics, in a new report, says firms with 19 or fewer employees were responsible for 78 percent of all jobs created in the 1987-92 period, and those with fewer than 100 accounted for virtually all jobs created. Big companies were mostly shedding positions. New jobs created by smaller firms paid as well as new big-firm jobs. Even small firms in manufacturing grew nearly as fast as those in other industries during the recession.
"It was younger firms that carried the economy through the recession," the Cognetics report notes. Another Cognetics finding is that in the 1987-92 period locally-based operations in a state grew more than twice as fast as establishments belonging to a firm headquartered elsewhere. Out-of-state businesses tend to pull back when things get tough.
Entrepreneur Magazine in February polled its readers, most of them owners or prospective owners of small business, on their biggest problem. It was an inability to get money for a start-up or expansion. Kirchhoff hopes his research results will stimulate more small-business loans.