With company life spans growing shorter, young firms help fill the gap
The increasingly dynamic nature of the economy means that while workers themselves may be living longer, companies are not.
The average life span of a company listed in the S&P 500 index of leading U.S. companies has dropped by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Richard Foster, a Yale University professor and an emeritus director of McKinsey & Co. Fowler has estimated that, by 2020, more than three-quarters of the S&P 500 will be made up of companies virtually unknown to us today.
Here’s a close-to-home example: In 1896, General Electric was one of the 12 original firms on the newly formed Dow Jones Industrial Average. Today, the company — which maintains a strong health care presence in Wisconsin — is the only one of the 12 still listed on the index.
Coming off a week in which four Wisconsin companies announced the collective loss of 1,000 jobs, the notion of “creative destruction” in the marketplace is more than just economic theory. It’s a painful reality for those who will lose their jobs.
It demonstrates why creation of new companies is so vital to workers and the economy. A report released this week by the Ewing Marion Kauffman Foundation in Kansas City showed Wisconsin still lags most states when it comes to company creation, even if other studies show Wisconsin does a better job of keeping companies alive once they do start.
One of the many ways Wisconsin helps to grow — and sustain — fresh crops of companies is the statewide Governor’s Business Plan Contest. Launched in 2004, the contest has logged 2,905 entries across four broad categories: advanced manufacturing (738), business services (916), information technology (846), and life sciences (405). Not every contest entry results in a company, but many do — especially for those contestants who reach the semi-final and final rounds.
A recent review of the 247 companies that were finalists in the contest’s first 10 years revealed they have collectively raised at least $160.6 million in all forms of financing, which includes $108.4 million in angel and venture capital and $52.2 million in federal Small Business Innovation Research grants, venture debt, loans, and other sources outside sales revenue.
The latter figure is much harder to track, but about two-thirds of all past finalists are still in business today — which means they’re selling products and services.
That survival rate runs ahead of national statistics. The U.S. Small Business Administration reports that seven out of 10 new employer firms survive at least two years, half at least five years, a third at least 10 years, and a quarter stay in business 15 years or more.
Data from the U.S. Census revealed that 69% of employer establishments born to new firms in 2000 survived at least two years and 51% survived five or more years. Survival rates were similar across states and major industries.
The U.S. Bureau of Labor Statistics has reported that 49% of establishments survive five years or more, 34% survive 10 years or more, and 26% survive 15 years or more.
Why do most businesses fail? According to the Dun & Bradstreet Business Failure index, 92% fail due to a lack of financial management or marketing skills and knowledge.
That’s why structures such as the Governor’s Business Plan Contest help improve survival rates. Companies rarely fail because their technology wasn’t “gee-whiz” enough. They fail because they haven’t fully considered the rigors of building a company around that technology, with the goal of gaining customers and selling products and services that sustain the company over time.
Finalists in the 2014 version of the contest will be announced soon. They will range from companies with innovative life science technologies, to software for games, recreation, and professional services, to novel ways to inspect and clean water. They’re judged by about 80 judges from varied backgrounds, and they receive feedback along the way from those judges and other mentors. It’s all part of a process that helps young companies not only launch, but also endure.
Shorter life spans for mature companies mean younger companies are needed to take their places in the economy. The Governor’s Business Plan Contest is one such pipeline.
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