What are the most and least successful businesses per industry?

Of all the new businesses launched in the U.S., about 20% will fail within a year. Worse still, about 50% will fail within four years.

The main reasons behind a business closure include a lack of a market, poor hiring decisions, and one issue we can all relate to—not having enough money. Global pandemics are also much higher on the list than they were in 2019.

You can't guarantee that your business will survive, but understanding the risks goes a long way toward keeping your business safe. Here's everything you need to know about startups going under.

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Startup Failure Rates: Key Statistics

The U.S. Bureau of Labor Statistics has tracked the number of new businesses launched in the country year over year since 1994. That quarter-century of data has revealed a great deal about how long new businesses tend to last, as well as which industries perform better than others.

Here are the key statistics, from the U.S. Bureau of Labor Statistics and other sources:

• 20% of new businesses go out of business within just one year
• 50% drop out by the four-year mark
• 80% fail within the first twenty years
• The healthcare and social assistance sector performs the best
• The construction industry is the worst
• The number of new businesses peaked in 2006 , with 715,734 launched that year
• Business closures peaked shortly thereafter, reaching 253,000 in the final quarter of 2008, as a result of the 2007 recession
• The pandemic forced 25% more businesses to close between March 2020 and February 2021 than the usual average

One interesting finding is that the failure rate begins to slow down shortly after the first four years, but it doesn't disappear entirely. By the time a business reaches its 20th anniversary, only about 20% of the businesses in its initial cohort will still be in operation. In other words, for every five startups that launch, one will fail within a year, and three others will be gone after 20 years.

Startup Failure Rates by Industry

Some industries are easier to survive in than others. Healthcare and social assistance fare the best as a category, while the construction industry has the lowest survival rates over time. Of all businesses launched in those two industry categories in 2004, for example, 56.9% of healthcare and social assistance businesses were still in operation five years later, compared to just 40.8% of construction businesses.

Similar breakdowns for other industries are hard to come by. A 2016 report compiled this table of business failure rates by industry, using a retention rate that tracked how many businesses were still in operation four years after they first opened:

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The main takeaway here is that the first few years are the hardest. Business failures happen quickly in the early years and only begin to level off after the first four years.

Failures continue to occur regularly and can happen at any point during a business’s lifespan, but they are particularly common in the first five years. If you’re launching a startup yourself, you’ll want to develop a solid five-year plan and be willing to adjust it as needed.

The Impact of COVID

While this is not an issue we expect to recur, the impact of the coronavirus pandemic on startup success is worth noting. According to the U.S. Bureau of Labor Statistics, 1.6 million U.S. businesses (19% of them) were required to close temporarily during the pandemic, while 4.7 million (56%) saw a decline in demand for their products or services.

The hardest-hit sectors were the airline industry (76% of establishments saw a decline in demand), hotels and food services (71%), and “mining, quarrying, and oil and gas extraction,” with 70% of establishments in that sector reporting a drop in demand due to the pandemic.

But what about permanent closures? According to a Federal Reserve study examining the first year of the pandemic, 200,000 more U.S. businesses permanently closed between March 2020 and February 2021 than usual—a 25% increase from the norm. Barbershops, nail salons, and other in-person service businesses were hit the hardest.

Although business closures were between one-third and one-quarter higher than usual during this period, the news is actually better than many had predicted. Still, the report warns that we may see more closures in the coming year as credit payments and deferred rent become due.

Why Startups Fail

A wide variety of factors can contribute to a business's failure, and not all of them can be controlled. But what can a new business owner do to avoid being among the half of startups that fail within the first four years, and instead join the half that succeeds?

The business analytics firm CB Insights conducts studies on the most common reasons for startup failures. They have released two or three updates each year since 2014, so they have stayed on top of the issue.

Here, we'll take a look at their definitive ranking of the top reasons why businesses fail, drawing on case studies and additional data as needed. And don't worry—we'll let you know what your business can do to avoid the most common pitfalls.

Here are the top six most common reasons startups fail:

1. No Market
2. Ran Out of Runway
3. Hiring Challenges
4. Better Competitors
5. Poor Business Plan
6. Poor Marketing

1) Not for Sale

The biggest reason a startup fails? Poor market fit. CB Insights found that this factor was cited as a concern in a staggering 42% of business closures.

A startup might be offering a great solution to a problem, but if the problem doesn't affect a large enough group of potential customers, that business won't have the market it needs to survive.

The takeaway: Create something that people need and can't find elsewhere. Your handcrafted reusable grocery bags might look nice, but if your customers already have a burlap sack that does the job, you won't sell yours. If your current product or service isn't solving a real problem, your business won't grow or retain customers.

And even if commercial success is within reach, it might still be too far off. That’s the stated reason for one of the biggest startup failures in recent memory, Alphabet’s “Loon,” which aimed to provide global internet access via balloons. Despite a total of $125 million in disclosed funding, Loon shut down in January 2021.

“Despite the team’s groundbreaking technical achievements over the past nine years, the path to commercial viability has proven to be much longer and riskier than hoped,” Astro Teller, head of X , told the Financial Times.

This goes hand in hand with the second most common reason why startups go under: running out of money.

2) Ran Out of Runway

Getting a business off the ground is a grueling process that inevitably takes years. Even if things are moving along relatively quickly, a business can run out of the funds it needs to become profitable. Nearly one in three startups—to be specific, 29% of failed businesses—cited a lack of cash as a contributing factor, according to CB Insights.

That figure may be an underestimate, as research by U.S. Bank found that 82% of failed small businesses went under due to either “poor cash flow management skills” or “poor understanding of cash flow.” Granted, there is a wide gap between the findings of these studies, but both results agree that dwindling cash flow is one of the main reasons behind a company’s failure.

In a separate but related category, CB Insights notes that 18% of failures are linked to pricing issues, in which products or services are priced too high to sell well or too low to turn a profit.

In some cases, a business may have ambitions that exceed what it can realistically achieve, such as every failed Kickstarter campaign aimed at creating a holographic display or a swarm of autonomous nano-drones. In other cases, the market simply isn’t as strong as expected, or the return on investment from marketing campaigns is a few percentage points lower than it needed to be. And perhaps that flashy new corner office or the company’s VoIP system wasn’t actually necessary in the budget.

The takeaway: Budget carefully and cut back where you can. Categorize all your expenses and compare your spending to that of similar businesses in your industry.

3) Hiring Problems

A company is only as good as its employees. Startups can pivot away from their original plan, but they can't pivot away from their team. And hiring the right people is especially important for a startup, given its small size. If two founders have been running the entire company, then their new hire makes up a full third of their entire workforce.

CB Insights found that 23% of business failures are due to an inability to assemble the right team, making this the third leading cause of failure to launch.

Common reasons for poor hiring practices include relying on emotional or "gut" instincts rather than a checklist, prioritizing technical competence over community and team compatibility, and failing to spot exaggerations or lies from candidates.

The takeaway: Consider working with a top-notch recruitment firm, or at the very least, invest a significant amount of time in figuring out the hiring process for your business. Above all, don’t just hire for a “culture fit,” as this will lead you to favor new hires who have the exact same blind spots as your existing team. You want someone who adds value to your culture—someone who brings a fresh perspective and a new skill set.

4) Stronger Competitors

Your business may be doing well, but if your competitors gain the upper hand, you'll still come up short. CB Insights found that 19% of business failures are due in part to being outcompeted.

Other contributing factors are similar, such as the 13% whose product launch was poorly timed or the 13% who lost focus. In both cases, competitors gained ground due to missteps by businesses serving the same customer base.

Venture-backed companies are particularly vulnerable to this pitfall. Smart device company Jawbone fell victim to this problem: The $3 billion startup raised a total of $930 million in funding over 17 years, but it still went under, liquidating its assets in July 2017. The company sold fitness trackers and wireless speakers, but was unable to capture a large enough market share in the industry to satisfy its shareholders.

The takeaway: Okay, the takeaway here isn't quite as clear as you might hope. The truth is, you can't really control how strong your competition is. You can only do your best to improve in a variety of areas. Time your product launches right for the market and stay focused, rather than trying to do everything for everyone.

5) Poor Business Plan

Another common pitfall is the lack of a business model, an issue that affects 17% of failed startups, according to CB Insights. It’s good to remain flexible about your business plan. But having no plan at all? That’s very bad.

While it's difficult to get people to speak openly about a poor business plan, one case study worth considering may the downfall of Beepi, a used car marketplace that shut down in February 2017.

“They were running the business to raise money, and then to get someone else to take it over,” an anonymous source told TechCrunch.

Business plan failures come in many forms and sizes, however, beyond purely financial ones. Common issues include a failure to adapt to the market and a failure to establish a competitive compensation package for employees. Interestingly, another potential problem is the opposite of poor hiring practices—some businesses fail to develop an exit strategy for removing unproductive co-founders.

The takeaway: Plan out your business model, keeping in mind any common pitfalls that may you. And, as you move forward, keep updating it to reflect the latest data on your company’s performance. Remember, those first few years can be brutal.

6) Poor Marketing

One final common reason for the typical startup failure is a poor marketing plan, which CB Insights cites as contributing to 14% of business failures.

Data virtualization startup Primary Data raised $100 million in equity and debt before shutting down in 2018 anyway. Its technology was “never quite as compelling as it needed to be,” given that it was selling “mission-critical” software, as was reported at the time. This ties into another common problem: a business with a user-unfriendly product. And the company’s burn rate wasn’t great, either, so they didn’t have much going for them.

Some founders are great at building a product, but not at selling it. Still, all your expertise in coding or manufacturing can't replace a good focus group. You'll need to know how to turn a target audience into leads, and leads into customers.

The takeaway: Don't skimp on your marketing budget. Every aspect of running a business is important, and even the best product-market fit in the world won't mean much if you can't attract customers.

Verdict: Running a Business Is Tough

Business markets, cash flow, hiring, competition, planning, and marketing: These are all common reasons why startups fail. They’re hard to get right, and no quick checklist of potential mistakes will save you. But that challenge is exactly why entrepreneurs love the game.

Ultimately, this article alone won't be enough to save your business. But we can give you an idea of the most critical issues you need to watch out for. Finding a market fit is key, as is maintaining a balanced budget, and hiring top talent will pay off in the long run.

Most importantly, those first four years are the toughest. If you can get through them, you're already ahead of half your competition, and that goes a long way.

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Source: The Statistic Brain Research Institute
http://tech.co/startup-failure-rates-industry-2016-01