Many entrepreneurs take a dim view of academia and its relevance to starting businesses. Years of studying small businesses in the States has taught me that the average entrepreneur is a failure, forming a business that will be gone in five years, while earning less money and working longer hours than if they had taken a traditional job. Perhaps it’s understandable if those starting businesses ignore the numbers. And yet academic research can be useful to new businesses, since it also reveals some of the reasons certain entrepreneurs are so much more successful than others. A multitude of experts are on hand to offer advice on how to start and grow a successful company on TV and in business books and magazine articles, but instead of offering another opinion, I’ll show you what the data says.
Let’s start with the basics. One of the most important ways to improve your odds of success as an entrepreneur is to pick a favorable industry. Start-ups are more likely to survive in some industries than in others. There is a 17% point difference in the four-year survival rates of firms across industry sectors and a similar gap in the ten-year survival rate between start-ups in the worst and best manufacturing industries.
Sales, employment growth, and profitability of start-ups also depend a lot on industry. One study showed that start-ups in the software industry were 608 times more likely than start-ups in the restaurant industry to become one of the Inc 500 companies (the 500 fastest growing private companies in the United States). Which industries are best for making the Inc 500? Those that are the most technologically intensive. The more industry employees are technically trained, the better the odds a start-up will become one of the 500 fastest growing companies in the country.
New firms also do better in industries that have large, rapidly growing markets. And they do worse in capital intensive industries – industries like steel and autos that require a lot of expensive equipment – and industries, like mining, in which the average size of firms is large.
Other decisions you made before you started will also have had a huge influence on whether your business can enjoy sustainable success or not. For instance:
- Think big. Businesses started with more assets and employees have greater access to capital, higher profitability, greater sales, and lower odds of failure.
- Be limited. New corporations outperform new sole proprietorships on almost every possible measure: speed of business development, access to external capital, survival, sales growth, employment growth, and profitability.
- Go all in. Businesses started on a full time basis acquire more external capital, are more likely to survive, and have higher growth and profitability.
- Don’t go it alone. The performance of new businesses founded by teams is better than that of businesses started by individuals.
- Write a business plan. Start-ups in which founders write business plans tend to advance further in product development and venture organisation, have higher odds of raising external capital, have greater sales, and have lower odds of failure, particularly if the plan is developed before the entrepreneur begins marketing or talking to customers.
- Don’t be a ‘me too’. New firm performance is enhanced by seeking customers missed by others rather than pursuing the same or similar customers with the same or similar products as a previous employer.
- Sell to businesses, not consumers. Most of the fastest growing private companies sell to businesses rather than individuals.
These patterns may well reflect the limited choices that entrepreneurs have about how to set up their businesses, but they also suggest that you can make decisions that enhance your odds of success. Many entrepreneurs fail to take actions that have been found to increase new business performance. So just to be safe, you might want to pay attention to the choices correlated with the success of start-ups that grow quickly. For instance:
- Marketing works. New companies that start marketing sooner, and that emphasize the implementation of marketing plans, perform better than other start-ups.
- Monitor your finances. New businesses that stress financial controls are more likely to survive and grow.
- Don’t be a discounter. Competing on price hinders the performance of new ventures, which are better off competing on service, quality or some other dimension.
- Be focused. New businesses that focus their activities on a single product or market when they first start out perform better than those that do not.
- Follow the map. New businesses founded in an orderly manner – starting with the identification of the idea, then proceeding to business planning and the evaluation of the idea, the acquisition of resources, and the development of a product or service, and ending with the marketing of the new product or service, – outperform other start-ups.
You can prepare yourself to be a better entrepreneur. Despite the stories about successful entrepreneurs such as J.R. Simplot, the inventor of the frozen French fry, who quit school at age 14 to start a company, or indeed Alan Sugar, who can point to a similar tale, your odds of success are actually much better if you go to college. Better educated entrepreneurs have greater access to external capital, lower business failure rates, greater business sales and employment growth, and more profitable ventures.
Owner-managers sometimes cite an aversion to working for someone else as a reason for going it alone. Stories, such as the tale of Michael Dell’s creation of a multi billion dollar company from a University of Texas dorm room, give many people the impression that working for someone else won’t help you to be a more successful entrepreneur. But the longer entrepreneurs work for someone else, especially in a professional, management or supervisory capacity, prior to starting their companies, the less likely their businesses are to fail, the more profitable they tend to be, and the more likely they are to grow.
In particular, experience in the industry in which your new company will operate also seems to enhance the performance of start-ups. Small businesses have faster product development, greater access to capital, higher likelihood of survival, higher profitability, greater sales, and more employment if their founders have prior experience in the industry in which they are starting their companies.
The right vision
Finally, successful entrepreneurs start their businesses for the right reasons. People who start companies to avoid working for someone else don’t tend to do very well as entrepreneurs. Their businesses tend to make less money, grow more slowly, and are more likely to fail, than those of people who start with the goal of making high profits.
This shouldn’t be surprising. New businesses often reflect what entrepreneurs want. People who start businesses to avoid working for others tend to want autonomy, not money. As a result, they tend to accept lower financial performance in their businesses.
There are a lot of opinions floating around about why some entrepreneurs are more successful than others. This white noise makes it difficult for you to find information that comes from careful, scientifically-designed studies. But these studies are out there, and they identify several things that make start-ups more successful: First, industry matters a lot. Second, the decisions you make about such things as the strategy you adopt, to the market you target, to the internal controls in your business, affect your start-up’s performance. Third, starting a business for the wrong reasons – notably to avoid having a boss – tends to lower performance. Finally, going to school and working for a while in the industry in which you are thinking of starting a company before you take the plunge enhance the performance of young companies.
Scott A. Shane is Professor of Entrepreneurial Studies at Case Western Reserve University. This article is an extract from his book, The Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policymakers Live By published by Yale University Press.