Some industries are better positioned for startups than others. Startups are well-known for their role in reshaping industries, building new ones, and creating substantial wealth for founders and early employees. Because of their small size, startups benefit from their ability to experiment and adapt more quickly than established firms, which under the right circumstances, can mean rapid innovation and growth. When it comes to startups though, the incredible success of a select few has gone a long way in shaping public perception. What’s less well-known is that while most startup businesses will never achieve scale, they do still play a vital role in creating jobs and driving the U.S. economy forward. According to the Bureau of Labor Statistics , more than 416,000 new firms opened in the year leading up to March of 2018, the largest number since the Great Recession. While new firms represent just a small proportion of total firms, job openings from these new businesses disproportionately impact employment figures. Between 2017 and 2018, for example, startup firms gained 1.7 million jobs, compared with a net gain of just 518,000 from older firms.
Starting a new business doesn’t come without risk. Just one in two establishments opened between March of 2012 and March of 2013 survived to March 2018. While businesses may close shop for a variety of reasons—such as selling the firm, lack of product-market fit, or poor team dynamics—a majority of owners cite lack of capital as the main reason for closing. Raising the necessary capital to start and sustain a new business can be challenging. According to the most recent Annual Survey of Entrepreneurs , the median cost to start or acquire a new business in 2016 was between $25,000 and $50,000. Perhaps surprisingly, just a small percentage of companies cover these costs with investment capital, whether from friends/family or venture capitalists. Instead, the vast majority of new businesses fund operations through a combination of personal savings, bank loans, and credit cards.
That said, industry matters when it comes to starting and funding a new business venture. To help aspiring entrepreneurs fund new business ventures, researchers at Seek Business Capital analyzed the amounts and sources of capital needed to start a business by industry. For each industry, Seek Capital used data from the U.S. Census Bureau and Bureau of Labor Statistics to calculate the proportion of businesses relying on various sources of startup capital and how that proportion deviates from the average across all firms. For example, across all industries, 0.41 percent of new firms that require startup capital make use of venture capital financing. Within the information industry, that same proportion is 2.33 percent or 6.7 times the average across all firms. These differences, among other factors such as median startup costs and 5-year survival rates, are listed below (industries are listed in ascending order by total employment). Here’s what the researchers found:
The utilities industry includes any businesses focused on electric power production/distribution, natural gas distribution, or sewage processing. The industry is not a hotbed for new businesses; only 706 new establishments were formed in the past year, compared to more than 739,000 across all sectors . However, the few companies entering the market rely heavily on grants and government loans , at rates seven to nine times the average across all firms.
While this industry includes large organizations responsible for prospecting, licensing, and operating extraction sites, the majority of establishments in this sector are subcontractors that handle specific support tasks connected with mining and drilling. Natural resource startups are attractive to venture capitalists because of the potentially lucrative returns that come with the territory. With that said, natural resource extraction is a game of odds, and the risks are high for new firms—just two in five companies make it to the five-year mark, the lowest survival rate of any industry on this list.
Farming may be one of the world’s oldest professions, but it is currently undergoing a quiet technological revolution. New startups in the space are merging traditional agriculture with the Internet of Things, machine learning, and more, devising new ways to maximize efficiencies throughout production cycles. Not only is it an exciting time for the industry, but it is also a stable one: two-thirds of all new businesses established in March 2013 survived through March 2018, giving this industry the highest five-year survival rate of any sector.
Even though the majority of firms in the real estate industry are small-scale brokers, lessors, property managers, and appraisers, these firms are subject to a complex network of large-scale economic factors that can dramatically affect a startup’s chance of success. Still, many new firms are able to break into the industry through a combination of personal savings and government loans, such as the Small Business Administration’s loan programs . Read: 7 Best Fix and Flip Loan Options for Real Estate Investors
While management firms have more ready access to venture capital financing and grant programs than other industries, they are also the single most expensive type of business to get off the ground, with a median startup cost of $100,000-$250,000. At that price tag, the 50 percent five-year failure rate can be intimidating for many aspiring business owners.
The arts, entertainment, and recreation industry covers a wide variety of enterprises, including film, spectator sports, art galleries, and more. A look at the different ways these firms raise funds reveals a lot about the diversity of opportunities in the field. While traditional sports venues benefit from government loan programs, venture capitalists have recently turned their attention to esports, investing millions in team management, fan engagement, and even game development.
The hyper-competitive information industry encompasses not only broadcast and publishing, but also the data-focused tech startups that have come to define Silicon Valley. Like Facebook, Google, and other well-known firms in the space, today’s information startups continue to attract venture capital financing at a rate that’s more than seven times higher than the national average.
The dividing line between education startups and technology startups is beginning to blur. Advances in streaming, artificial intelligence, and other technologies have enabled new education models that weren’t previously possible. Coursera, for example, is an online learning platform that offers thousands of courses, degrees, and certificates from some of the world’s best universities, all accessible to anyone with an internet connection. While Coursera benefitted from VC funding, business credit cards, personal credit cards, and grants are the most overrepresented sources of startup capital for education companies.
The transportation and warehousing industry consists of firms that use and support transportation operations, as well as those providing large-scale storage solutions. While business loans and personal credit cards are already some of the most common funding mechanisms across all firms, those in the transportation and warehousing industry rely on them roughly twice as much as in other field
Wholesale trade organizations focus their business models on reselling large amounts of raw and non-durable goods, cultivating a clientele of commercial businesses and specialty customers interested in purchasing bulk quantities. Owners of wholesale trade businesses often have large personal stakes in the success of their businesses, disproportionately making use of home equity loans and investments from family and friends.
Many entrepreneurs breaking into the finance industry go it alone as independent financial advisors or brokers, foregoing the institutional support of a major bank or investment firm. However, this can prove expensive at first, requiring upfront investments in office space and other necessities to run a firm. Although some finance and insurance startups will see VC interest, these firms rely on personal savings and business credit cards more so than the average firm.
When it comes to capital, the construction industry generally has a low bar for entry. Most new firms are residential contractors, who typically don’t require the expensive equipment that’s common among commercial developers. Purchasing smaller tools and renting larger items when needed is usually enough to get started, allowing family-financed businesses to grow. See: 15 Pro Tips On How to Flip a House for Maximum Profit
The professional and technical services industry encompasses various services that require extensive training, including legal, engineering, and accounting. Despite the high degree of education needed to break into these fields, professional and technical services firms have the lowest median startup cost of any industry. This sector, however, also tends to be highly competitive, which goes some way towards explaining the low five-year survival rate of 46.4 percent.
Aside from waste disposal, this industry casts a wide net, including security, travel arrangement, staffing, and more. The median startup cost for this industry is significantly below the all-industry median, which likely allows firms in this sector to rely more heavily on personal and business cards, as well as family savings.
Manufacturing includes any business centered around transforming raw materials into new products. In addition to a disproportionate amount of funding from grant programs, the manufacturing industry has the benefit of a relatively high survival rate, likely owing to the adaptability of small businesses operating in this space.
Restaurants account for the majority of businesses in the accommodation and food services industry, amounting to 78 percent of all such establishments . While restaurants are well-known to be a risky business endeavor, the prevailing wisdom that dictates 90 percent of restaurants will fail in the first year is demonstrably false. According to the BLS, just over 11 percent of first-year businesses in this sector failed in the past year—a far cry from what might be expected if nine out of every 10 restaurants went under. With that said, restaurants are still risky and can be difficult to secure funding for. For that reason, many restaurateurs rely on SBA loan programs such as the Standard 7(a) or SBA Express loan.
Even though the expansion of online marketplaces has put strain on brick and mortar storefronts, first-year survival rates for retail trade establishments have actually improved . This is likely tied to the very reason that is putting many physical retailers out of business: it’s simply cheaper and less risky to run a retail business from a spare bedroom than it is from a traditional storefront. With that said, five-year survival rates have remained roughly the same for years. Interestingly, retail trade businesses make use of investment from friends and family, as well as home equity loans at rates two times the average across all firms.
The health care and social assistance industry is a promising entry point for today’s entrepreneurs. According to projections from the U.S. Census Bureau , the population at or above retirement age will outnumber those under the age of 18 by 2030. This will be the first time in history that older adults outnumber children and will create a massive surge in demand for healthcare products and services. Healthcare startups capable of raising the requisite capital—disproportionately through grants and loans—will be well-positioned to grow.
Data on median startup costs and funding sources are provided by the U.S. Census Bureau 2016 Annual Survey of Entrepreneurs , the most recent data available. Statistics on establishment and employment counts are from the U.S. Bureau of Labor Statistics 2017 Quarterly Census of Employment and Wages . All data shown are annual averages. Five-year businesses survival rates are provided by the Business Employment Dynamics data set, also from BLS. The five-year survival rate was calculated between 2013 and 2018. Median startup costs were determined based only on firms reporting a dollar amount range for initial business costs. Firms reporting “none needed”, “don’t know” or “item not reported” were excluded. For each industry and for all U.S. firms, the Annual Survey of Entrepreneurs provides data on the percentage of firms making use of various forms of capital to finance startup costs. The most overrepresented sources of capital for each industry were determined by comparing the given percentages for each industry to the given percentages across all U.S. firms. For example, a capital source reported as “2.5X” for a given industry is used 2.5 times more often for startups in that industry than for startups across all industries. Firms reporting “none needed”, “don’t know” or “other sources” were excluded. More From Seek
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