Last year, the Ewing Marion Kauffman Foundation released a report describing what had happened over the 2004 to 2007 period to the cohort of 2004 start-ups that it has been following. While their method of identifying the cohort of new businesses is complicated and not necessarily comparable to data from other sources, like the Census Bureau, their findings are nonetheless interesting.
In this post, I’m going to focus on what they uncovered about outcomes. Knowing what happens to the average new business helps entrepreneurs to figure out if they are doing better or worse than the norm.
(For most of the numbers, I adjusted what the authors reported about surviving businesses to incorporate information about the entire cohort so that readers can see what outcomes look like for the average firm in a cohort of new firms.)
So here’s what the data showed:
- Most of the entrepreneurs were still in business; the study reports that 73.4 percent of the businesses started in 2004 were still in operation in 2007.
- Few of the entrepreneurs had cashed out of their businesses; none of the start-ups had gone public and only 3.5 percent had been acquired or merged.
- A minority of the businesses was profitable; 44 percent of the cohort showed a profit in 2007.
- The average profit for a 2004 start-up was $40,115 in 2007 (survivors averaged $54,652).
- Few businesses were very profitable, 80 percent of the 2004 cohort was either out of business, operating at a loss, or had a profit of less than $25,000 in 2007; 6.7 percent of the cohort had a profit of more than $100,000.
In short, the Kauffman Firm Survey confirms much of what we know about the performance of new businesses. Most of them survive their first few years, but few entrepreneurs cash out. Only a minority of new businesses are profitable, and very few are highly profitable.
* * * * *Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.