Many entrepreneurs have heard the ominous warning from others: “Most businesses fail within the first year!” Is this accurate, or is it more of a blanket statement based on the occasional horror story? Let’s break down just how successful (or not) new businesses are and see what numbers we can dig up about how long they last before closing their doors for good.

How Many New Businesses Succeed? What the Numbers Say

While it depends on the source, I referenced a few different websites to see just how long new businesses survive before throwing in the towel. Here’s what I found.

The Survival Rate for Companies Launched in 2018

Shopify condensed data from the U.S. Bureau of Labor Statistics — a trustworthy source when it comes to data surrounding American businesses — looking at the 733,721 businesses started in 2018:

• In Year 1, more than one-fifth (20.6%) had closed.
• In Year 2 (2020), 31.3% of those businesses failed.
• In Year 3 (2021), 37.9% closed.

What this means is that by this point, not even two-thirds of the original group of businesses were still in operation after three years.

• In Year 4 (2022), 42.7% were closed.
• In Year 5 (2023), the failure rate hit 48%.

Overall, the numbers tell us that only about 50% of the original businesses made it at least five years. Averaging it out year to year, 12.1% of the remaining businesses failed each year.

So, the scary warning that most businesses fail in the first year isn’t really true, according to Shopify’s data.

The Long-Term Success Rate

What happens to startups after those first five years, though? Investopedia also took data from the U.S. Bureau of Labor Statistics and found that within the first 10 years of being open, 35% of companies remain. And after 15 years, 25% remain open for business.

So, is starting a business quite as perilous as many make it out to be? No. But according to the statistics, it is true that most don’t survive long-term. Why?

The Most Common Reasons Why Businesses Fail

Are there patterns when it comes to the biggest hurdles startups run into? Quite possibly. Here are some of the most common roadblocks entrepreneurs run into that can very easily end up ruining the company.

1. Running Out of Money

Some research claims that a lack of money is the biggest reason why many businesses (possibly 82%) fail in their early years. Too many entrepreneurs simply don’t prepare for properly managing cash flow.

One of the biggest expenses, by far, is payroll and the associated taxes. Often, for businesses that have a physical location, rent is a huge expense. Everything after that quickly adds up — software and tools the company must pay for, insurance, licenses, any physical goods the company might sell, professionals like accountants and bookkeepers, and so on.

At the end of the day, there’s often not much profit left. In fact, many companies find themselves with a negative cash flow. A business can’t survive that long under these conditions.

2. Poor Management and Planning

A lot of entrepreneurs, understandably, start a business based on something they’re passionate about. For instance, someone who loves exercising might decide to open a gym.

However, running a gym is completely different from working out, and this is exactly where a lot of entrepreneurs run into a huge problem. Having a passion for fitness is entirely different from having a passion for running a business. Importantly, having the former doesn’t necessarily mean the business owner is going to have the latter.

Running a business means mastering things like interviewing and hiring a team, mentoring the people who work for the company, managing finances, and increasing sales. For a gym owner, notice how none of these things have to do with working out!

3. A Lack of Demand

Entrepreneurs often suffer from something that most human beings do: bias. An individual might start a business thinking it’s a brilliant idea. However, that doesn’t mean everyone else will feel that way.

To get a business off the ground and started on the right foot, there has to be a demand — a hole in the market that the company fills. What’s the problem, and how does the business solve it? Better yet, how can the company solve it better than any other competitor? This is what keeps customers coming back to spend more money with a brand.

Once a business is more stable and has that steady cash flow I just talked about, the company will have more room to try new things and take bigger risks. But until it gets there, everything needs to be about meeting demand, growing revenue, and keeping the lights on.

4. Failing to Focus on People

A company is nothing without (1) the people who keep it running and (2) the people it serves. In fact, I would argue that all successful businesses boil down to forming great relationships.

Let’s start with the employees. Do people want to work for this business? Does it have a stellar company culture? Do employees stick around long, or is the turnover rate a concern?

What about the business’s customers? Do they keep coming back for more? Are they loyal to this brand? Has trust been established?

If both employees and customers frequently come and go, it’s going to be incredibly hard to establish a steady cash flow. Unfortunately, too many entrepreneurs don’t make this a priority.

There is Room for New Brands

Many will argue that the market is simply too saturated. Too many startups try and fail. Running a business is too risky, too expensive, too unstable.

Yes, all of these things can be true — but not necessarily! With the right strategy and people, a brand can survive long into the future.