How much do average startups make & why do startups fail?

In an earlier blog, I had mentioned the sustained proliferation in startup companies around the globe; a proliferation that had seen, for example, an increase of up to 500,000 American startups in January of this year alone. Indeed, such a figure would suggest something very much worthwhile at the end of the startup rainbow, some worthwhile ROI to animate this entrepreneurial zeal. 

As incentive so commonly comes in the form of revenue, this ever-increasing percentage of startups in the SME category, begs the question ‘what is the average revenue of a small business?’ and/or ‘what is the average salary of a startup founder?’ 

For this article, I’ve done some research to uncover what sorts of numbers are behind this flourish in entrepreneurship (in $USD) and also to provide further small business statistics on what factors contribute to startup failure rates. 

So do read on: here are some useful points to serve as a guide for your ambitions, should you be thinking of taking your own ideas to market. If you are already running your own company, then getting acquainted with some relevant stats is good practice for formulating or refining your business plan.

What is a ‘small’ business? 

Depending on where you are, its parameters will differ. In the EU, a small business is one employing fewer than 50, in the United States, it’s fewer than 500. In Australia, 15. Wherever the case, the definition remains as any company with a smaller staff and revenue than the average corporation. 

The Difference Between Operating Revenue and Income

Often there is confusion in accountancy terms, so let’s get these ones right. ‘Operating revenue’ simply refers to the amount of money your business generates before accounting for things like taxes and general expenses. This is the money flowing in. This is your sales. Its source is your income-generating activity, and often it is called ‘top line’ since it will be the first figure featured in your income statement. 

On the other hand, ‘income’ or ‘operating income’, if you like, is what comes after. The big (or small) crumbs off the table, once operating costs (rent, admin, supplies etc.) have had their way with you. You could call it ‘net income’ or the more popular term ‘bottom line’.

Operating income does not include taxes or interest. 

Average Revenue Statistics for Small Businesses ($USD)

The following small business revenue statistics span the past 6 years:

40% of small businesses are profitable, 30% breaking even and 30% actually losing money. 

86% of small business owners make less than $100,000 a year in income (on average $71,813) - windswept aspirations aside, the notion that a business owner is ‘rolling in it’ is an enduring myth. 

On average, a small business with two founders will generate 30% more income - when you can share the obligations of management and finances with another, it improves your chances of increased earnings whilst also making you 19% less likely to scale too soon. The pace of your growth is key to not losing business later on. 

Small businesses with no employees have an average annual revenue of $46,978.

Small business owners self-employed by their own incorporated businesses earned an average of $50,347 in 2016.

In 2016, the number of nonemployer firms making $1 million to $2.49 million in revenue increased from 35,584 to 36,161 (a 1.6% increase).

On average, businesses with less than $5 million in annual revenue saw a 7.8% jump in annual sales in 2015.

Reasons & Statistics for Small Business Failure

‘It’s a jungle out there’ as the well-worn saying goes. However, with an average of one in twelve businesses closing down within their first year, statistics show that this failure is more self-inflicted than it is owing to the external competition: 

42% - lack of innovation and/or practicality in products or services.

Over 80% - lack of cash flow.

14% - poor marketing strategies.

17% - no clearly articulated business model. 

Roughly half of all new businesses survive beyond 5 years; 33% beyond 10.

Reasons for Startup Failure

Although startup failure rates will vary according to research sources, it remains as no surprise the parallels between small businesses in general and those of the startup. And once again, cash flow difficulties are the main culprit: 

38% - no new capital or ran out of cash altogether. Insufficient funding and reckless spending routinely wreck startup aspirations. 

No product-market fit - 35% of startups fail to satisfy a genuine market need.  Startup founders will often confuse a problem that is interesting to solve with one that is practical in solving. 

20% outcompeted by the… competition. Once a good idea is unleashed in the market, inevitably, others will try to take advantage of it. 

19% - insufficient business model. Having no monetization strategy at scale can be as fatal as being shackled to a single market channel. Good ideas alone are not enough. 

15% - pricing issues. Striking that balance between covering costs and attracting customers has always been - and always will be - a prominent factor in any startup post-mortem. 

14% - wrong team in place. No common vision, no expertise and no motivation can sink a startup from the get-go. 

10% - mistimed product launch. Release too soon, and it could signal to punters insufficient quality and create a negative impression that will make winning them back particularly difficult. Release too late and the window of opportunity will have shut.  

8% went to market with a poor product. - when aggressive marketing and the pursuit of capital trump a primary focus on product quality, it can lead to customer flight and a company’s ultimate demise. 

7% - investor team disharmony/disagreements. Internal disharmony can be toxic. And it need not be limited to a founding team. Ignoring or bowing too much to investor demands can seriously injure a company. 

6% failed to pivot successfully. If pivoting is not carried out with caution and lacks sufficient supporting data, a company can soon be led in the wrong direction. 

5% - burn-out/lack of focus.  This is owing to the typical, stoic delusion that to create a successful startup, you must always be ‘burning the candle at both ends’. This is why the work-life balance ratio does not usually figure highly on founders’ list of priorities. It can cause one to become blinkered from seeing the need to pivot and/or cut losses when dead-ends are met, or when passion wanes.  

Best Trending Small-Business Industries

On the topic of 'revenue', for small business ventures in general, technology, health and energy are considered the most lucrative target industries to be involved in, with demand almost guaranteed to be high.

Best Trending Startup Industries

As for startups more specifically, the following continue to be on an upward trend:

•  Accounting, tax preparation, bookkeeping, and payroll services
•  Health services/practitioners
•  Medical/diagnostic laboratories
•  Real estate agencies/brokers and related activities
•  Legal services
•  Company and enterprise management
•  Dental services
•  Nonmetallic mineral mining/quarrying

Summary: More Than Just Revenue

As within any realm of competition - with the startup/small business world being no exception - very few go on to ‘make it big’. And for those who do not, a survey of the preceding figures suggests that a more modest income awaits. 

Independence & Sense of Achievement

At the same time, it is still more than possible to do well enough as a small business owner and there’s little doubt of the personal satisfaction that comes with the sense of independence and personal achievement it can provide.

There’s much to be said for any new idea that remains viable enough to keep a business up and running. And remember: as 50% of new businesses survive beyond 5 years, this also promises 5 years of another form of ‘revenue’ not mentioned thus far - business experience. 

Market Knowledge & Experience

Ultimately, it is this very experience that will equip you to work both harder and smarter than the competition, and season your capacity for gaining market knowledge to ensure your idea retains a good product-market fit.

As knowledge breeds confidence, this will guide you to a stronger business plan whilst enabling you to face those inevitable, entrepreneurial challenges. Don’t just hope that your startup will succeed - know that it will. 

Realize Your Revenue Potential

If you’re seriously thinking about addressing the market with an idea of your own, we’d love to hear about it. Clarifying your ideas to ensure maximum relevance and revenue-generating potential is what we do at Startup House.

So feel free to reach out to us at hello@start-up.house