Comparing Stats on Firm Survival

Not surprisingly, those involved with business incubation are compelled to compare the success of incubated firms with their nonincubated counterparts. After all, business incubators are in the business of helping small firms succeed. Unfortunately, often when incubation professionals, the media, and others make these comparisons, they don’t always get the facts straight.

The fact is, no one has ever compared the survival of incubated vs. nonincubated firms. Therefore, when people make comparisons, they typically look at two separate data sets:

  • An NBIA statistic from the 1997 report Business Incubation Works, which reported that 87 percent of firms that graduated from responding incubators since inception were still in business.*
  • A fact sheet from the U.S. Small Business Administration’s (SBA) Office of Advocacy, which reports that “two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years.”** (It’s also interesting to note that people often quote small firm failure rates among the general population to be as high as 80 percent to 90 percent – a statistic that is just plain incorrect. Always go to the SBA’s Office of Advocacy for correct and current data on the success of small firms in the U.S.)
While both of these facts stand alone just fine, combining them into one statistic isn’t exactly kosher. The NBIA study is based on data collected at one point in time, representing a snapshot of the industry in 1997. The SBA data is based on a longitudinal study that tracked companies over a period of years from the time they were created to show trends that occurred during that period. Concerns with making direct comparisons include the difference in start-up dates of the firms in the two studies; the fact that there is no control for regional differences in the location of these firms; and differences in the definitions of survival and units of analysis.***

Thus the two data sets are not directly comparable and cannot offer empirical proof of the positive impact of business incubation. However, looking at them side by side does strongly suggest that business incubation reduces the risk of small business failure and offers a valuable qualitative comparison.

If you would like to discuss the success rates of nonincubated vs. incubated firms, NBIA suggests you present the information as follows:
  • Business incubators reduce the risk of small business failures. Historically, NBIA member incubators have reported that 87 percent of all firms that have graduated from their incubators are still in business. In the general population, 66 percent of new firms survive at least two years, and 44 percent survive at least four years. It is important to note that these figures are not directly comparable, due to differences in survey methodology, time frame and other factors. However, looking at them side by side does strongly suggest that business incubation reduces the risk of small business failure and offers a valuable comparison.

It’s important that as an industry we do not perpetuate inaccurate use of data regarding the success of incubated and nonincubated firms. By understanding the differences in the available data, you can help the public understand the value of business incubation. Even though the data are not directly comparable, there is compelling evidence that business incubation increases a firm’s chance of survival.

 

* U.S. Small Business Administration (SBA), “Frequently Asked Questions,” www.sba.gov/advo. Accessed on March 9, 2007.

** Molnar, Lawrence A., Donald R. Grimes, Jack Edelstein, Rocco De Pietro, Hugh Sherman, Dinah Adkins and Lou Tornatzky, Business Incubation Works. Athens, Ohio: NBIA Publications, 1997.

*** David Lewis (assistant professor in the Department of Geography and Planning at the University at Albany in Albany, N.Y., and a published researcher on incubation topics), in conversation with the author, February 2007.