Businesses Face High Rates of Infant Mortality

If you want to explain the pattern of business failure, think of the analogy of infant mortality. The odds that a business will die are highest in its infancy and drop over time.

In fact, by the time that companies enter their teenage years, the odds that they will go under have flattened out. A twelve year old business and a seventeen year old business face roughly the same odds of being shuttered in the following year.

In the figure below, I use Bureau of Labor Statistics (BLS) data?on the survival of the 1994 cohort of new businesses to illustrate this point. The figure shows the percentage of businesses alive in a given year that failed during the subsequent year. For example, 20.2 percent of the businesses founded in 1994 died between 1994 and 1995. However, only 4.3 of the businesses founded in 1994 and still in operation in 2010 died between 2010 and 2011.

The figure indicates that the new business failure rate for companies started in 1994 steadily declines until 2006 and then flattens out. While the odds of going under never disappear, they pretty much hold steady at 5 percent once the businesses reach age 12.

Source: Created from Bureau of Labor Statistics data

About the Author

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.

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