Study: Start-Ups Tend to Stay Small

Most small businesses don't grow much after their birth, says a new small business study, which also concludes that people today "probably know more about the life cycle of ants than... the life cycle of businesses."

Brian Headd of the Small Business Administration's Office of Advocacy and Bruce Kirchhoff from the New Jersey Institute of Technology set out to examine small business growth.

"While firm size data exists, little firm age data exists," they wrote in the report "Small Business Growth: Searching for Stylized Facts (pdf)."

"This has hampered efforts to understand the life cycle of firms overall and by industry. There is a need to document the dynamics of new firms and the effect of the business cycle on the growth, decline and survival of firms."

The duo studied U.S. Census Bureau data from 1992 to 2002, following the 10-year life cycle of single establishment firms.

The data shows that the median employer firm's size is four employees. Firms with fewer than 20 employees are almost all single establishment firms. They averaged just over one establishment per firm (1.01) while businesses with 20 to 99 employees averaged 1.32 establishments. Those two categories make up 99 percent of all firms in the United States. Most firms with less than 100 employees start and stay small, they said, adding that "this steady state is not surprising considering many owners have minimal interest in growing."

The researchers also found that single establishment firms were integral to the economy during the 10 years they followed them, as those businesses accounted for about half of the private sector net employment increase.

The authors said although most firms tend not to expand much after getting established, "growing firms are generally a constant share of the universe with a minor business cycle effect, firms with employment growth slightly outnumber firms with employment decline, fast growing firms in one year tend to revert to the mean in later years, and business survival rates seem steady over time."

About 35 percent of employer firms had no employment change from one year to the next. The researchers report that about 11 percent closed each year and about 25 percent experienced a drop in employment each year and about 28 percent grew.

Firm survival rates were similar for firms born in 1992 and 1997 with a 50 percent survival rate after four years for both time periods. "This gives the impression that survival rates fluctuate little over time," they said.

By Sharon McLoone |  October 24, 2007; 3:20 PM ET Data Points
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