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Chapter 1: What is the main topic discussed in this episode?
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Welcome back.
You were listening to another episode of KeepTheChange.co.nz's Money Mail. As I always like to say when I'm starting these, I hope you're keeping well out there. I hope you're making good choices. What a time to be alive. It is bloody, it is crazy out there with market highs and volatility and IPOs and wars and AIs and all sorts of shit. What a time to live through.
Now, this week, I want to get straight into some data that I often see pop up. And I actually think many years ago, I believed this to be true. But I'm getting to the stage with writing money mail that I've covered so much ground that I'll see something and I think, hmm, I wonder where that's come from. You know, I wonder how accurate that may be.
And all the time, whenever I read business articles, there'll be this comment in the bottom and it's something like, 70% of businesses fail in the first five years. And someone's saying it so confidently. And I was actually at a workshop recently where There's a lovely young guy and he's wanting to get into self-employment and business.
But he had all this data as to how risky it is and how many of them fail. And we're all kind of talking about his belief that then he may fail. I'm like, hey, mate, where'd you get that data from? Where did that come from? And I've got a couple of pods in a row. You'll hear money mail next week as well.
It's going to be something similar around people believing that they're going to die before they're 65 and just how dangerous that is. But this one highlights too, what do we believe to be true that isn't? And what statistics are we using to back up indecision and inaction in our life?
I've had to go through a process of searching for data to break my beliefs and look at things that I think, hmm, maybe it can't be done, and then go and look at somebody who is doing it and think, okay, if I rang them and said, oh, this can't be done, they'd be like, what do you mean, bro? I'm doing it. How's that call going to go? Oh, yeah, but you've got, so that's actually my belief.
Oh, you've got this or you've got that. So I try and find people to quash my disbelief and go, ah, they must know something I don't. But I see this scary stat get thrown around all the time. 70% of small businesses fail within the first five years. I don't know who started this, but it often surfaces in the comments, like I say, or Barry's bloody barbecue banter.
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Chapter 2: What is the origin of the 70% business failure statistic?
I couldn't actually find it. But AI did start to say like, oh, this is referenced at times. And I then tried to find some stats data of how accurate is it? And it turns out that that stat is misleading at best and often flat out wrong. And then it got me thinking about what fail even means.
So when these people say 70% of small businesses fail within the first five years, like what does fail even mean? So I actually found some data and realized that most business survival statistics don't measure failure. They measure whether a business is still operating or not.
Now, most of us, I would assume, would think that failure is like financial ruin or it didn't work and you ended up in debt and bankruptcy, liquidation, like the real heavy end of it. But failure and ceasing trading or deregistering or stopping or no longer operating are two very different things.
So if somebody was running a business in New Zealand, they decided to move to Australia or go overseas and they closed that business down, did they fail? Well, that's kind of what these commenters are often saying. Or do they just cease trading and go and do something different?
So no longer operating a business does not automatically mean bankruptcy, insolvency, debts, financial ruin, or someone losing their house. A business closing is counted the same way, whether it is liquidated due to inability to pay its debts or quietly shut down because the owner got a job. That can happen too. In New Zealand, you can register a company in minutes and start trading immediately.
You don't even need a company to have a business in New Zealand. You could just start trading, start making some money, and declare those profits in your tax return. You're effectively in business. So it's all good and well to start a company, but it also means a lot of people start companies without really knowing what they're doing. So naturally, a lot of them don't last.
Often people set up companies and don't need them, and then they end up getting closed down. Or they set up a company for a side hustle, and they go and do it for a bit, and like, ah, it's not my thing. The company needs to be shut down. Starting the company is easy. Starting a business is easy. But building something good is hard, and that's like anything in life.
So what do the numbers actually say? Well, Official Stats New Zealand Business Demography data tracks enterprise births and whether they survive over time. So this is the data that I found. What it tends to show is on average, 92% of small businesses are in business for at least one year. Now get this, 10 years later, 44% of them are still in business. That's 10 years later.
Oh, don't 70% fail in the first five years? Now the biggest drop-off does happen over two to five years. And after that, the survivors tend to stabilise. Now these statistics also change depending on how many employees the business has. Typically, the more employees, the longer the business lasts.
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Chapter 3: How does the definition of 'failure' impact business statistics?
But if you think you're going to avoid it, you won't. But I think... the fear-mongering stats are misleading and inaccurate. And it was this, you know, money mail is sort of inspired in a way by the guy in the room that's going, shit, you know, I'd love to have a crack, but I know how dangerous it is and how risky it is. And citing these statistics that aren't even real.
But then also, remember all those stats we were just talking about, that's all businesses. And each industry is very, very different.
So across these industries, you've got rental, hiring and real estate, financial and insurance services, agricultural, forestry and fishing, other services, construction, professional, scientific and technical services, information, media, telecommunications, arts and recreation, transport, postal, warehousing, administrative and support, mining, retail trade, healthcare, social assistance, wholesale trade, automotive and food industry services.
electricity, gas, water and waste, manufacturing, public administration and safety, education and training. Then what do we do? Business. It's business. Well, every one of those industries, that's just 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13. There's like 19 or 20 there, you know, that would all have different statistics based on
how many people are in that, and also the caliber of the people running those businesses. So data can get out of whack very, very quickly. And that's where I think we have to be careful. And in business as well, if you don't show up, if you don't give the market what it wants at the price that it's willing to pay, eventually you will get in trouble. You will go bust.
I try and create new products and services all the time. And if they're not perceived to be more valuable... People don't want to transact with me. They're like, oh, cool, Luke, I do like you and trust you, but that product doesn't look that valuable to me, so therefore I'm not going to pay for it. Now, there's two things happening there.
Maybe I'm not articulating the value well enough, so that's me failing to do it. It doesn't mean I'm a failure, but if you don't give the market what it wants, it won't give you what you want, and it won't transact with you. So that's the reality. of business.
And that's probably why a lot of businesses don't last forever and don't last for a long period because they fail to adapt to what the market actually wants. And the early years can be the hardest because you've got to build something from scratch often as well. You know, skills and being good at it matter more than the motivation or the initial hiss and a roar.
The idea that you now have because of AI, for instance, That's all good and well to have that hiss and roar and be real excited to buy it. How are you going to go at year three when you're in the trenches, still trying to adapt to how the market's changing and finding new customers and having to pay wages and things?
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Chapter 4: What do recent statistics reveal about small business survival rates?
So we work with aspirational business owners all over the country and we get to share some of those lessons for free via the podcast. So if you didn't know that that exists, there is a resource over there to help you get going and get growing.
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I have a goal to help 100,000 Kiwis improve their financial literacy. Generate Kiwi Saver scheme has sponsored Keep the Change to help me reach more people and make this a reality. Cheers to Generate. Head to generatekiwisaver.co.nz forward slash change to find out more.