Business Life Cycle Trends

Startups are always exciting, but what gets capital investment firms excited is trends in business life cycles.  A new post on Polus Capital by Founder, Alan Ying, looks at what he calls the “infant mortality phase.”

The chart above shows data from the U.S. Census Bureau, and the Bureau of Labor Statistics.  The chart was compiled by Scott Shane for a really interesting article at Small Business Trends focusing on startups.  The full chart is located here.

“One take-home message I get from the data are that only around 40% of ANY businesses survive to five years.” explains Ying. “The data don’t differentiate from B2B versus consumer-facing, or business services versus industrial or consumer services.”

What Ying refers to as the “infant mortality phase” is when a company’s ongoing viability is in doubt on a year-to-year, even month-to-month basis.

For example, if it takes 5 years to lose 60% of businesses.  It then takes another 10 years to lose another 10%. That’s a 12% annual failure rate during the first 5 years, and only a 1% annual failure rate for the next 10 years.

While these data don’t show anything about revenue, evidence from Polus Capital suggests the vast majority (>90%) of the businesses that generate $5M-$15M revenue are more than 5 years old.

From an investment standpoint, companies older than 5 years are a statistically much less risky on the downside – they just don’t go out of business frequently.

So, are you in the “infant mortality phase?”

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