A new report called ‘Does Entrepreneurial Success Generate Economic Growth?’ published by the Institute of Innovation and Knowledge Exchange (IKE) has found that only 10% of start-up businesses remain solvent past the 15 year mark, with a massive 60% failing in the first 5 years.
With many catering equipment distributors falling into the start-up category, this could be concerning reading for recently-formed firms in the sector.
The report shows nominal growth in the number of enterprises starting with 0-4 employees. No matter the investment level, there was very little change in survival rates across a five year period, with 10% failing in first year, 25% by the second, 40% by the third and by year four almost half had died.
The survival rate per sector shown that 51% of enterprises set up in property survived, following by IT and comms with 49% surviving. The sector where the most business deaths occurred was in accommodation and food, with nearly 65% having failed after 5 years.
Half the would-be entrepreneurs cited that the perceived barrier to starting a business is funding. But the research suggested that perception and reality show very different pictures. The UK invested £10m of risk capital into high tech accelerators, producing 1,124 start-ups. Crowdfunding has also been successful in the UK for generating funds for start-ups totalling €2.4bn targeted at 419 funding initiatives across 16 platforms, giving an average of €5.7m per funded initiative. There is also a high intensity of venture capital investments primarily focused on innovative tech start-ups, with 0.081% of GDP going into venture capital, ranking the UK third across Europe, topped only by Denmark and Luxembourg who have smaller GDPs.
The UK’s stagnation in productivity has also fuelled a renewed focus on entrepreneurship to drive up growth. The report states that gross value added in Euro in the 0-9 employee enterprise size range in the UK stands at 71% in productivity gains, however productivity drops in 9-49 employee range, and this could be aligned to the lower innovation activities in 10-49 employee at 58% of all activities being innovative in nature.
The report identified a key measure of whether or not the UK has appropriate conditions and polices to support entrepreneurship is ‘how many jobs are created 15 years’ after the enterprises were formed. In 1998, 239,600 were established and 15 years later 26,200 were surviving, a 10.9% survival rate. Across the 15-year period, the 1-4 employee sized enterprises were particularly hard hit by attrition and overall, there was a fall in employment of 4,200.
However, in the long term, major gains to net employment came from those enterprises that started up at birth with more than 20 employees. The main losses arose when smaller start-ups expanded to 20 plus employees, which suggests problems in trying to manage growth. It is also possible that the start-ups didn’t have the skills or capital to come through the 2008 recession, as the majority of losses occurred within the first 9 years.
A lack of more diverse skills than the ones needed to create the business in the first place, has been found as contributing to start-up death. The research suggested that larger teams in bigger start-ups have better survival rates, are more innovative, become successful exporters, have greater business longevity and drive employment growth.