Startups and their founders often tout the value of failing fast and, more importantly, failing forward. It’s a concept surrounded by the assurance that through trial and error, most early-stage companies will find their way and grow.
The reality is a bit different, according to a massive multiyear study of over 158,000 startups across the globe. The researchers found that nascent enterprises are more fraught than we are led to believe when we rely on success stories such as Facebook or Twitter to provide a picture of what it’s really like. Most startups struggle to consistently provide revenue and employment growth in the first five years, the researchers observed.
The study, titled The Rise and Fall of Startups: Creation and Destruction of Revenue and Jobs by Young Companies, was authored by Antonio Davila of the University of Navarra, George Foster and Carlos Shimizu of Stanford’s Graduate School of Business, and Xiaobin He of Fudan University. It was published recently in the Australian Journal of Management.
It tracked companies that launched between 1999 and 2004 for five years after opening for business. The businesses represented a diverse group of industries and geographic locations. The authors honed in particularly on the second through fifth years of operations to determine how these young companies handled revenue generation and job growth.
According to the Small Business Administration, only about half of all new businesses will survive for five years. Yet all of the 158,000 startups in this study lasted five years. However, they didn’t all necessarily grow, and some even experienced a reversal of prior growth.
Small businesses that last for at least five years are generating revenue and creating jobs, backing up President Obama’s case for creating the Startup America initiative in the U.S., and borne out by the latest report of women-owned businesses, which says that these firms–many of which are new businesses–employ 8.9 million people and in the last five years.
The darker side of this job growth, the researchers revealed, is that it isn’t really growth at all. Instead, the study found that, while 65% of the jobs were created by startups in their fifth year of operations, there were just as many jobs shed by other new businesses, making it a wash.
Only about 7.5% of the companies analyzed were able to add jobs for three years running, and most cut back jobs during their fourth and fifth years. Part of the reason may be that startups in that stage of development are ripe for the picking by larger companies. Take the example of WhatsApp, which Facebook acquired for $16 billion last year. Though the text messaging service amassed 450 million users, it had only 55 employees. At the time, Facebook announced that the WhatsApp team would stay in Mountain View–and why not? It’s only a stone’s throw from the Facebook campus, teeming with 4,600 employees.
As for revenue growth, always a tricky prospect for fledgling companies, the research shows that around 34% of fifth-year revenues were those pulled away from competing businesses. In Silicon Valley, this happened time and again, even when the company that floundered got to market first. Think: AltaVista scrambling to monetize search and free email until Google emerges three years later and steals its thunder. Ditto for Friendster -> MySpace-> Facebook.
Those that were able to pull through experienced bumps to the balance sheet. More than 50% of startups saw revenues grow in year three also experienced setbacks in the fourth and fifth year, and were unable to post increases for three years in a row.
The upshot: founders on fire with a concept need to maintain a mindful approach as they navigate the choppy waters of their first five years in business. There are plenty of reasons startups fail. Among them running out of cash, not being able to support growth, ignoring the customer and the competition. This research proves that it’s also important to do a reality check and expect that nothing will run smoothly.