The best way to learn about entrepreneurship is to get into it. In other words, start a business. And these startup statistics show just how great that journey can be.
From being your own boss to having financial freedom, the benefits of being an entrepreneur are endless.
But it is, of course, much easier said than done.
Before you launch yourself into entrepreneurship, it is important to get the basics right. That means understanding what a startup is and knowing important statistics like how many entrepreneurs fail and the main reasons they do.
In this article, we’ll introduce you to what a startup is and present you with the top ten startup statistics aspiring entrepreneurs need to know in 2020.
Startup Statistics Snapshot:
- Two in Five Startups in the US Are Successful
- 56 Percent of Startups Make it To Their Fifth Year
- Most US Businesses Either Break Even Or Lose Money Continuously
- 44 Percent Of US Businesses Fail In Their First Four Years
- Startups With Two Founders See More Growth Than Those With One
- Financial Issues Are the #1 Reason Behind Startup Failure
- About One-Third of Businesses Start With Less Than $5,000
- Seven Percent of Startups Fail Because of Bad Decision Making
- Premature Scaling is a Leading Factor in Startup Failure
- Mentored Startups Achieve Better Results
In This Article
- 1 What Is a Startup?
- 2 Funding Sources for Startups?
- 3 What Is the Difference Between a Startup and a Small Business?
- 4 What Are the Ten Most Successful Businesses To Start?
- 5 10 Startup Statistics for Small Businesses
- 5.1 1. Two in Five Startups in the US Are Successful
- 5.2 2. 56 Percent of Startups Make it To Their Fifth Year
- 5.3 3. Most US Businesses Either Break Even Or Lose Money Continuously
- 5.4 4. 44 Percent Of US Businesses Fail In Their First Four Years
- 5.5 5. Startups With Two Founders See More Growth Than Those With One
- 5.6 6. Financial Issues Are the #1 Reason Behind Startup Failure
- 5.7 7. About One-Third of Businesses Start With Less Than $5,000
- 5.8 8. Seven Percent of Startups Fail Because of Bad Decision Making
- 5.9 9. Premature Scaling is a Leading Factor in Startup Failure
- 5.10 10. Mentored Startups Achieve Better Results
- 6 Startup Statistics Summary
- 7 Want to Learn More?
What Is a Startup?
A startup is a new company established by at least one person with the intention of developing and selling a product or service. They can be part of any industry across the world. The unique selling point that differentiates them from existing products on the market are often marketed as innovative or revolutionary.
Startups usually begin with little revenue and limited financial budgets for business operations. Sometimes bootstrapping the business is the only option to begin with. A startup’s main financial goal is to acquire financial support from investors in order to develop their product idea.
Funding Sources for Startups?
While there are dozens of different sources of startup funding, some are more common. According to investment banking firm Growthink, the following are the five most popular funding sources for startups.
Savings: These refer to the personal savings of the startup founder(s) and is a common method among entrepreneurs looking to bootstrap their business. This could be their income, money saved up over the years or raised from activities like selling other products and/or services, etc.
Bank loans: Banks can provide financing to entrepreneurs and these usually come with a fixed or variable interest that must be repaid over a fixed period of time. Failure to do so may result in bankruptcy.
Friends and family: Borrowing money from friends and family is also a common way to fund new businesses. Though it’s a popular method, you should consider how your relationship with the lender may be affected should problems or misunderstandings arise.
Angel investors: These are private individuals who are willing to volunteer their money to invest in a startup. Most of them are entrepreneurs themselves and have the financial capacity, experience, and knowledge to back a startup.
Venture capitalists: Venture capitalists, or VCs, are similar to angel investors. Instead of individuals, these are companies that fund startups that are at a more advanced stage. VCs offer more capital and are also more invested in the startup’s business including strategic decision-making, marketing, and more.
What Is the Difference Between a Startup and a Small Business?
The biggest differences between a startup and a small business lie in their product and structure.
Startups’ products tend to be unique and tech-related. They are usually ideas for products and/or services that are not widely (or at all) available on the market. For example, a software that digitizes and streamlines the cumbersome process of booking freight shipments.
Small businesses, on the other hand, sell products and services that consumers are already familiar with. Small businesses may or may not be tech-related. For example, an online men’s fashion store.
Because startups launch only with the idea for their product, they require investor funding to develop it. That means that they do not start generating revenue until the product is ready and available on the market.
Small businesses sell products or services that do not require much development and are much easier to start. This way no major investor funding is needed and they can begin to generate revenue on their very first day of operations.
What Are the Ten Most Successful Businesses To Start?
Businesses that offer services in the overarching sectors of professional, scientific, and IT have the highest average profit margin. At 11.9 percent, that means that nearly $12 of every $100 earned in revenue are profits. This is followed by the healthcare sector with 9.6 percent.
Here’s a look at the ten business types that are the most profitable ranked by their profit margins. As we’ll see, the majority fall under the above-mentioned sectors:
- Financial services (bookkeeping, accounting, tax preparation, financial planning): 18.4%
- Real estate leasing services: 17.9%
- Legal services: 17.4%
- Medical outpatient clinics: 15.9%
- Property managers and appraisers: 14.9%
- Dental clinics: 14.8%
- Real estate agents: 14.3%
- Other health care practitioners: 13.3%
- Management and consulting services: 12.1%
- Storage facilities: 11.6%
The above are just some basic startup statistics and facts to get you interested. Now that we’ve piqued your interest, here are 10 startup statistics. Let’s dive deeper.
10 Startup Statistics for Small Businesses
1. Two in Five Startups in the US Are Successful
The very first startup statistic is an important one to help establish an understanding of the current startup landscape.
40 percent of startups in the United States are successful, which is determined by whether or not they’re able to turn a profit (Small Business Trends, 2020).
Yes this makes fewer than half of startups in the US successful. And it makes startup success appear somewhat daunting. However strategic planning can go a long way. Understanding what contributes to their closure can prevent you from failure.
To start, aside from knowing the basics of how to start an online business, you must also conduct thorough research on what industries are performing well, and what products or services are in demand.
2. 56 Percent of Startups Make it To Their Fifth Year
The act of starting a business can already be challenging. But maintaining it and driving it to long-term success is a whole other game.
Just over half (56 percent) of all US startups make it to the five-year mark (Unix Commerce, 2019).
If you’re new to the game and looking for startup success, do not let the initial failures knock you down. Like with most things, it’s nearly impossible for inexperienced entrepreneurs to get business right on their first try. Accepting failure as part of the process is an important lesson with entrepreneurship.
In fact, startup statistics show that experienced entrepreneurs are more than three times as likely to achieve startup success than those new to the game.
3. Most US Businesses Either Break Even Or Lose Money Continuously
Finances appear to be one of the main determinants of small business success. Six in ten US companies are struggling to keep their revenues in the green, meaning they’re either breaking even or making losses (Small Business Trends, 2020).
Of them, exactly half are walking that fine line separating profit and loss, while the other half are having difficulties turning a profit and are constantly losing money.
As a new business owner, it’s tempting to want to invest more in anything that can help to grow your business. That can mean anything from Google ads to marketing courses. But it’s crucial to prioritize and keep your overheads to a minimum, especially if revenue is still low.
4. 44 Percent Of US Businesses Fail In Their First Four Years
Launching a business can be exciting. But amidst the thrill, it’s important to not lose sight of your strategy and business goals. This is because the initial few years of a business are usually the most precarious.
The latest statistics on startup failure rates show that more than four in ten US businesses fail within their first four years (Small Business Trends, 2020).
In fact, looking at the total number of small businesses that started in 2014, as many as 20 percent don’t even make it past their first year.
As the years go by, it becomes harder and harder to stay afloat. The number of failed businesses increases every year. By their second year, an average of 30 percent will have failed and this figure rises to 38 percent for the third year.
5. Startups With Two Founders See More Growth Than Those With One
One key aspect to consider before starting a business is whether you’ll be embarking on the journey alone or engaging the help of a business partner.
As we’ll see in this statistic, this decision has a role to play in small business’ success rate.
The latest figures show that startups with two founders perform significantly better than those founded by a single entrepreneur.
More specifically, they experience three times more growth, obtain around 30 percent more funding, and are also more unlikely to engage in premature scaling (Small Business Trends, 2020).
As the saying goes: Two heads are better than one. And this has certainly been proven true with startup founders.
6. Financial Issues Are the #1 Reason Behind Startup Failure
Here’s another startup statistic to help you better understand just how vital it is to get finances in check for small business success.
Two of the most common reasons startups fail are related to their finances.
A whopping 82 percent of startups in the US that fail, fail because of cash flow problems, which makes it the most common reason for failure (Preferred CFO, 2020). Specifically, these relate to having an inadequate understanding of cash flow and improper cash flow management skills.
Another common reason startups fail is because entrepreneurs launch products before acquiring sufficient capital to sustain business operations. As many as 79 percent of startups that do so because of this.
7. About One-Third of Businesses Start With Less Than $5,000
How much money do you need to launch a new business?
The latest startup statistics show that around one-third of businesses launched with an upfront capital of less than $5,000 (Small Business Trends, 2019).
However, the amount of capital needed varies greatly from business to business, and depends on factors such as your product, revenue goals, and more.
While certain small businesses like accounting and ecommerce can be started with $5,000 or less, others like restaurants and medical offices are much more expensive. These can cost more than $100,000 – more than 20 times the capital needed for an online retail store, for example.
Doing the research before starting to plan a business is important to know the feasibility of it.
8. Seven Percent of Startups Fail Because of Bad Decision Making
Though it may not be among the top reasons businesses fail, this next statistic is still an important one for aspiring entrepreneurs.
Seven percent of failed US startups result from inefficient decision-making by the company (CB Insights, 2019).
More specifically, they often take too long to reverse decisions that are detrimental to the company’s success. These include hiring employees who aren’t a good fit and choosing the wrong aspect of the product to develop, which end up costing the company a lot of wasted time, effort, and energy.
Plus, if these aren’t managed well, it can also snowball into employees feeling frustrated with the lack of proper and decisive leadership, and company progress. In the long run this will hurt employee job performance and morale.
9. Premature Scaling is a Leading Factor in Startup Failure
Oftentimes, a startup’s success is determined by how fast it is able to grow. That said, there is an inherent danger in scaling too quickly.
According to the latest startup statistics, more than 70 percent of failed startups do so because of premature scaling (Forbes, 2019).
This refers to companies expanding faster than they are able to cope. Premature scaling can take the form of over-hiring, having an over-ambitious expansion strategy, acquiring more customers than existing resources can handle, and more.
When problems like these start to pile up, some will get prioritized, and others get put on the backburner and eventually forgotten. For early-stage startups, these can be the root cause of future problems to come and should be avoided at all costs.
10. Mentored Startups Achieve Better Results
If you’re thinking about starting a business, you may want to consider getting a mentor to help you out.
With so many aspects of a business to take care off, startup founders can often find themselves lost and overwhelmed. That’s where a mentor can really come in handy.
Small business success can be achieved better under the guidance of an experienced mentor. After all, who better to guide and advise you than someone who has the experience, knowledge, and connections to help grow your business?
Startup statistics show that businesses that engage the help of a mentor grow 3.5 times faster and raise up to seven times more funding than those without (Forbes, 2019).
Startup Statistics Summary
There you have it. These are ten of the most important startup statistics all aspiring entrepreneurs need to know.
We hope that these have provided you with a clearer picture of the startup success rate in the US and just how many entrepreneurs fail. You should also understand startups’ major challenges and what you need to do to reduce the chances of failing.