Exploring the Gap between Startup and Sustainability
by Bo Fishback and Bob Litan
We know this: new business formation is vital to economic growth. However, we also know this: the early years of a business’ life are the most challenging and vulnerable.
At the Ewing Marion Kauffman Foundation, we have funded studies that provide a detailed portrait of who starts businesses and where they start them. But until recently, we didn’t have solid data about what happens between startup and sustainability.
The Kauffman Firm Survey (KFS) is one of the ways we are filling the gap.
The largest longitudinal study of new business ventures ever conducted, the KFS has been tracking nearly 5,000 businesses nationwide since they were founded in 2004. Researchers are honing in on the formative years of these startups to understand the decisions that make a difference to their survival: how they are financed; the products, services, innovations these businesses develop in their early years; and the characteristics of businesses and owners that are key to business success.
Practically, the dataset so far has provided us a snapshot of how new businesses are organized and operate in their first two years of existence. Philosophically, the study over time will give us better insight into what affects survival, what doesn’t and when and where policymakers can jump in to support development and growth.
One key thing we’ve validated: there is no one business startup type. New businesses launched across a variety of sectors, from retail to construction, professional services to administrative support and more. What they did have in common: new businesses tend to start slim, with little overhead or human capital. Most launched as sole proprietorships, in home or garage offices, and with few, if any, employees.
The “walk before you run” nature of most startups is reflected in their sources for early financing, perhaps the study’s most compelling finding. Nearly 44 percent of new businesses had no debt financing in their first year of operation. Those that did shop for capital looked for relatively little and didn’t look far. In the first year, 17 percent launched with $5,000 or less; 16 percent started with between $5,001 and $25,000.
Most of that capital came from the business owners themselves: 30 percent financed their business on their personal credit card while 18 percent financed it with a personal bank loan.
Just 10 percent relied on outside equity to fund their firms, and an even smaller percentage, 2.7 percent, found that in venture capital. Business owners are shouldering the debt, the risk and most of the responsibility for their entrepreneurial ventures—and they’re holding onto control of their companies.
And the business owners themselves? Their portrait isn’t what you might expect.
Many started with little or no experience either in entrepreneurship or their industry. For more than half—58.5 percent—entrepreneurship was a new adventure, and just under 40 percent held five years or less of previous industry experience.
Starting a business is risky—and many new businesses don’t survive these first years. However, the KFS reveals that the rumor that 50 percent of businesses fail in their first year is far worse than the reality. At the end of the first two years of this four-year study, slightly fewer than 9 percent of the firms closed.
And the most surprising and encouraging statistic: KFS found that almost half of the businesses reported a profit in their first year.
But we’re not counting chickens here. It takes
time for business to fully hatch. So what can entrepreneurs
take away from the KFS? That there’s room
for their ideas, room for growth, and the odds for
business success could very well be in their favor.
Bo Fishback, is Vice President of Entrepreneurship at the Kauffman Foundation.
P | 816.932.1037
E | bfishback@kauffman.com
Bob Litan, is Vice President of Research & Policy.
P | 816.932.1179
E | rlitan@kauffman.com