Having rather excited myself with the entrepreneurial potential of Gen Y in yesterday's blog, I was subsequently given the research equivalent of a cold shower, courtesy of some fascinating data and insights provided by Prof David Storey of Sussex University.
In an event at the RSA hosted by Prof Jay Mitra of Essex Business School, Storey laid bare the sobering facts surrounding the survival rates of new businesses.
These are important lessons for those looking to run or invest in small businesses,and some of them go against the dominant myths of entrepreneurship. So I thought I'd share.
Some of the key points he made, drawing on a variety of rich and comprehensive UK and US datasets:
Three quarters of new businesses don't make it to the start of year 6
Most of these die between 18 months and 2 years. The famous valley of death. They survive this long on capital but then run out of cash
Despite what almost every business plan forecasts, only around 6% of businesses continuously increase their sales over that period. Most grow until year 3 and then flatten. But within that overall pattern there is often huge volatility in sales
Of those still standing at year 5, most are still the same size as they started, but more have contracted than expanded
By year 6, about 4% have sales of £1million or more
Some of these - a vanishingly small percentage - will go on to become economic "game changers" who single handedly change whole markets and economies
Predicting which these will be is nigh on impossible
So what is the key to survival? Storey's data gives us some empirically grounded clues. Those who are more likely to survive typically...
....have some big wins, early on. This creates early growth spurts which increase the business' credibility and attractiveness to investors
....show decent financial controls. In particular, they never exceed their overdraft
....exhibit less sales volatility
Factors such as age of the founder, their level of education or their previous experiences of failure are no insulation against business extinction, contrary to lots of the myth-making that goes on about entrepreneurs.
Beyond mere survival, and looking at what drives growth, Storey was circumspect. Essentially, as with so many complex phenomena, patterns of growth - what makes a business "gazelle" - are for the most part only clear in retrospect.
Much of this provides a wise note of caution to the Government's message about the entrepreneurial revolution they wish to encourage. Failure is very much the norm, not the exception.
And on another note, an interesting surprise for me came at the end of the session. In refecting on that point, and in asking Prof Storey in the Q&A about the role of chance and serendipity in business success, I mentioned in passing the potential value of qualitative/narrative data in understanding these emergent phenomena. His presentation had contained only quantitative data.
He surprised me somewhat with a funny but vehement denial of its value. "Narrative" he said, "is to an economist what garlic is to a vampire" and he went on to try explaining this further with reference to a sporting analogy.In essence, he said, qualitative data is subjective and distorted by the teller's perspective, and therefore unreliable.
Perhaps the economists out there can help me understand this, because I still don't. Why, when so much of what we now know in economic life is driven not by pure rationality and is as much the product of "animal spirits", relationships, deep context, accident and general "messiness" does the discipline (as does say, history) not embrace the value qualitative data can bring? What more could we learn about business survival and growth by capturing and analysing narrative accounts in a systematic, large-scale, multi-perspective and longitudinal way, as would any decent historian or anthropologist?
Or is economics still so much in thrall to maths and physics that to do so would be to admit defeat?