October 12, 2009, 9:00 am

Which Industries Are Most Favorable to Start-Ups?
By Scott A. Shane

In response to my post last week about Bruce Buschel’s decision to open a restaurant, a reader named Damian wrote, “You tease us with mention of research showing which industries are favorable to start-ups but then don’t provide a link to this information.”

I’m sorry, Damian. I didn’t provide that information because I have blogged about it before. But since at least one person is interested in seeing it, here it is (again):

First, the survival rates for new businesses are quite different across different sectors of the economy. In my book “Illusions of Entrepreneurship,” I produce a chart of business failure rates by industry sector using data from the Bureau of Labor Statistics. You don’t need to buy the book if you just want to see the chart. It’s available in a blog post that I wrote about 18 months ago.

Second, the odds of high growth vary across industries. In “Illusions of Entrepreneurship,” I summarize some research by Jon Eckhardt, a former Ph.D. student of mine, who looked at the differences across industries in the share of start-ups founded between 1982 and 2000 that made the Inc. 500, the annual list of the fastest-growing private companies in the United States. If you look at my book in Google Books, you can see that between 1982 and 2000, only 7/10th of 1 percent of new restaurants made the Inc. 500 list. That’s pretty low compared with computer and office equipment companies, where 4.2 percent of start-ups made the list.

Third, restaurants are more likely to fail than other new ventures. Industry failure rates can be computed from data available for download from the Web site of the Office of Advocacy of the United States Small Business Administration. On average, across all industries, 10.6 percent of United States establishments failed during 2006 (the latest year for which data are available). The failure rate for full-service restaurants was 12.5 percent.

While restaurants have a worse-than-average failure rate, they have lower failure rates than businesses in many other industries. For instance, they have a lower failure rate than bars (14.4 percent), taxi and limousine services (18.3 percent), sound recording studios (15.7 percent), and Internet service providers and Web search portals (17.5 percent). On the other hand, they have much higher failure rates than automotive parts, accessories and tire stores (6.4 percent), death care services (6 percent), and gasoline stations (9.5 percent).

In sum, restaurants are relatively risky businesses, but there are far riskier ventures that one could start.

Scott A. Shane is a professor of entrepreneurial studies at Case Western.

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