Starting a business- it ain’t that bad (especially healthcare ones)

Posted on September 9, 2015

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I came across three separate articles in the same day going over small business statistics. One of them was from Dave Tate, over at EliteFTS. Dave owns EliteFTS, whose primary business is selling fitness equipment. He stated in a recent article:

“It has been said that 90% of all small businesses will fail within the first year. Out of those who make it past the first year, 90% will fail within the next three years. Out of the remaining group, 90% will fail within five years, and those who do make the five-year cut, only 10% will last ten years. Finally, out of those left, less than 5% will make it to 20 years.

This means if 100,000 small business begin this year:

10,000 will make it past year one
1000 will make it past year three
100 will make it past year five
10 will make it past 10 years
1 will make it past 20 years”

The other number I read from a couple other articles, one I’ve seen a lot before, was “80% of small businesses fail within the first year.”

All of these numbers are

erroneous GIF

These numbers are on one side of the Grand Canyon, the correct numbers, unless there is some hidden data I don’t know about (please send it to me if there is), are on the other side.

And it’s not too hard to find the numbers. The Washington Post ran a solid article on this when addressing Rand Paul’s comment “9 out of 10 business fail.” The Bureau of Labor keeps track of this type of stuff as well.

BLS stats business surivial statistics

Seventeen years after starting a business in 1994, 25% of businesses are still around! The quote should be “80% of small business are still around after year one. Thanks…Obama?

Viscerally, these numbers seem generous. But to a degree, I feel they pass the eyeball test. Once every week or two my girlfriend and I will be walking in a neighborhood. Trying a new coffee shop or a new brewery. Every time we do this we pass business after business, where one of us will turn to the other and go, “How in the world is this place still in business?” A lot of these places are decrepit, they sell stuff only made in the 80s, there are zero people in the place, their storefront sign is barely legible, they only accept cash, there may very well be a homeless person in the front having an argument with themselves, yet there it is. Still standing. And I live in California! Consistently ranked bottom of the barrel in business friendliness, and a hotbed of new businesses / competition.

Which is another point about the above: When you consider how much technology has changed business, it’s incredible how many businesses have hung around.

Furthermore:

bureau of labor business survival healthcare business chart

The articles I read initially were by healthcare business owners. Healthcare business do better than the average! Note the chart above includes the recession. 10 years after opening 54% are still going! That’s a whopping ~20% better than the average business. Sure, maybe healthcare business owners have a leg up on the average, e.g. they tend to be better educated, the market keeps growing as the population gets older (there are few industries which the market is so easily predicted [1]), but still.

And it’s been estimated a third of the businesses that stop don’t do so for “out of business” reasons. They may stop because the business was sold, the owner got tired of it (yet was profitable), retirement, etc. What the real number is I don’t know. The point is not all the businesses that stop do so for profitability reasons. So, in terms of survivability, the numbers are even better than they appear.

I see two ways to view this:

1) By year ~5, half of small business are gone. Whether that’s because they went out of business, tired of running it, whatever. The odds of a coin flip you’ll be around in five years is pretty daunting. (Nearly 20% less daunting if it’s healthcare though.)

2) If you can do better than 65% of other people, you can be in business for 10 years, or more!

What I think people are trying to do when they throw out fairytale business statistics is, by hyperbolically stating how hard it is, you’re indirectly bragging. “Look at me! I do something 80% of people can’t do after only a year!” But after a year, with the real numbers of only 20% of small businesses gone, nobody feels enthralled going, “Yeah bro, I’m in the 20th percentile.” Or after ten years, “Check me out, I’m in the 65th percentile!”

I get it though. I’ve been self-employed for nearly five years now, and at times I swear to the heavens it is the hardest thing a person can do in a modern economy. That the employee life is cake compared to what I do. That those around me still don’t understand I’m approaching 30 years old and don’t get -and have never got- a single paid vacation day. (I also went a year without health insurance.) That there is no way 25% of businesses are still around 17 years later. Those numbers feel so wrong. Maybe it’s not that 80% are gone after two years, but surely it can’t take more than 17 years to get to that number?

But how we feel often doesn’t coincide with reality. You may think starting a business is so hard, but when 543,000 other people do it EVERY MONTH, is it really that bad?

What’s hard is doing it for a very long time.

Sticking with one thing for decades. We get to that ~20 year mark, and the stats are more in line with 80% of businesses being gone. Get to 25-30 years, and now we’re probably, finally, getting an A in class.

Sticking around and actually making some money, which for some might mean just making enough to hit an average income. Because make above 25k? You’re in the 66th percentile of small business owners. Make above 50k? A number where I think most would start considering good money (this would be 75th percentile of all American earners), and you’re in the 80th percentile. (Illustrating to make the same amount of money, it’s harder as a business owner than an employee.)

-> Keep in mind this is revenue. The average revenue is $44,000, but this includes outliers, which skews things. A more honest look at the difficulty of things is 80% don’t crack $50,000 in receipts. Never mind actual profit. 

Stick around for a decade or two or three, while making a decent income? Now we have something worth bragging about.

Exaggerating how hard it is to start a business is not good for those interested in doing it. There’s no point in unnecessarily scaring people. Plus, starting is not the tough part.

-> “What about competition?” Competition is an overrated thing to worry about. Looking at what I do, even if the entire market was interested in my services, I can’t help it all anyways. Sure, if you’re in the app business, you can scale that practically infinitely. But a lot of (most?) businesses don’t work this way, nor do you need it to. [2]

It is good to understand the likelihood you’ll be around in a decade, give or take, and how few make decent money. These are the the tough parts.

Personally, I pretty much always encourage friends to venture out on their own, to at least try it, but as a side thing to start. More than likely, they won’t be doing it after five years, and they won’t make more money than their current job pays them. But why not give it a shot? Starting isn’t that tough anyways.

-> Of course not all businesses fit here. Starting a restaurant, no matter how small, is, so far as I can tell, quite hard. (I wonder if food trucks ease the pain?)

However, I genuinely think fear is main reason they don’t. Fear of something so many people do every month! Back to the corporate world -many of them are unhappy with- they go. You may happily go back to the corporate world once you’ve tried the self-employment route! But there is only one way to know.

As for those who’ve done it, I hope to see you in year 25.

[1] This may be a huge problem in the future, if it isn’t one now. I’ve seen some very sharp researchers arguing we have already overbuilt our healthcare system. That we have too many hospitals etc. already. As I heard one doctor paraphrasingly say, “The solution to this will inevitably involve a lot of pain.” Not pain for patients; pain for the hospitals and the overbuilt system.

[2] If you feel strongly enough about what you’re doing, you may actually embrace competition. Let me use another industry as an example. Tesla Motors makes electric cars. Their CEO, Elon Musk, wants to electrify all cars, but his company can’t fulfill that demand.

Electric cars are less than 1% of the market, meaning Tesla Motors is even less than that. Tesla is currently having trouble meeting the demand of their consumers. At less than 1% of the market! Oh, by the way, the CEO is a frickin’ billionaire from this amount of consumers.

Take the fact the guy is a billionaire already, and his goal is to electrify transport, and he welcomes competition. He hopes other car companies get into the business. They can’t meet all the demand anyways, and it may even help push Tesla Motors further. Other companies can help build the electric car infrastructure, they can help destigmatize electric cars, some competition often brings out the best in us, and he truly believes all electric transport is good for everybody. Meaning if he dissuaded competition, he’d be trying to make life worse for others. For Tesla,  competition is actually an ally.

If you are say, wanting to help the world not be as overweight -> You can’t help everyone, at least not individually. So, if there is some competition out there, competition that seems ethically alright and all that, you dissuading that would be you acting in opposition to your overarching goal. It’d be you acting in a manner you felt was making people’s lives worse. And financially, what percentage of the market do you need to make a living you’re ok with? A percentage that likely leaves more than enough room for others.

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Posted in: Business