This is how long your business will last, according to science
It’s a big question, and one that nearly every entrepreneur and economist grapples with: how long do businesses generally survive?
A group of scientists appear to have at least partially unlocked the answer, with a somewhat surprising result: publicly-traded companies die —through acquisitions, mergers, bankruptcy or other reasons — at the same rate irrespective of how well-established they are, or what they actually do.
The magic number, a new study from scientists at the Santa Fe Institute in New Mexico reveals, is about 10 years.
The study, published in the journal Royal Science Interface and conducted by three researchers, was led by then-undergraduate fellow Madeleine Daepp under the guidance of Marcus Hamilton, Professor Luis Bettencourt and Distinguished Professor Geoffrey West.
“We gave her this basic idea, and she did the heavy lifting,” Hamilton, a postdoctoral research fellow at the institute, told Science Daily.
Hamilton said “there is remarkably little quantitative work” on what economists call company mortality, and existing theory and evidence yield contradictory answers. Some researchers think younger companies are more likely to die than older ones, while others think just the opposite.
“We wanted to see if there was any kind of standard behavior or if it was just random,” Hamilton said.
Daepp, now a graduate student at the University of British Columbia, analyzed Standard and Poor’s Compustat — a database of every publicly traded company since 1950 — using a statistical method called survival analysis. What she and her advisers found is that a company’s mortality rate was not affected by its past performance or even its products.
“It doesn’t matter if you’re selling bananas, airplanes, or whatever,” Hamilton said.
The reason behind their findings remains beyond their study’s scope, but the researchers hypothesize that the biological world’s systems and competition for resources might provide some sort of insight.