Stay Away from Startups in This Industry

According to data research that was conducted at Statistic Brain, startup companies in the information industry is most likely to fail than companies in other sectors of the economy. After the first four years of operation here is how likely a company in the following industries will still be operational.

  • Finance Insurance and Real Estate – 58%
  • Education and Health – 56%
  • Agriculture – 56%
  • Services – 55%
  • Wholesale – 54%
  • Mining – 51%
  • Manufacturing – 49%
  • Construction – 47%
  • Retail – 47%
  • Transportation, Communication and Utilities – 45%
  • Information – 37%

All startups involve large degrees of risk and most fail within the first five years. If starting and managing a company were easy, there would be a lot more entrepreneurs in the world. But as we can see not all industries have the same risk. As investors its up to us assess the risks of a company before we decide if we want to invest in it. One way to mitigate risk is to stay away from industries such as information, transportation, communication and utilities.

The information industry is considered by many as one of the most important economic sectors in society today. The demand for information goods and services from consumers is increasing. In terms of consumers, media including music and motion picture, personal computers, video game-related industries, are among the information industries. In terms of the business world, information industries include computer programming, system design, so-called FIRE (finance, insurance, and real estate) industries, telecommunications, and others. When demand for these industries are growing nationally or internationally, that creates an opportunity for an urban, regional, or national economy to grow rapidly by specializing on these sectors.

According to Wikipedia, “there are many different kinds of information industries, and many different ways to classify them. First, there are companies which produce and sell information in the form of goods or services. Second, there are information processing services. Some services, such as legal services, banking, insurance, computer programming, data processing, testing, and market research, require intensive and intellectual processing of information. Third, there are industries that are vital to the dissemination of the information goods mentioned above. Fourth, there are manufacturers of information-processing devices that require research and sophisticated decision-making. Fifth, there are very research-intensive industries that do not serve as infrastructure to information-production or sophisticated decision-making. Finally, there are industries that are not research intensive, but serve as infrastructure for information production and sophisticated decision-making.”

It’s important for the owner(s) of the business to understand the importance of having investors. A lot of inexperienced entrepreneurs only like the fun aspects of their business and focus only on that part. But this leaves most of the company’s operations unattended. This is why the leading cause of failure in startups is incompetence, which is attributed as the major reason for why 46% of startups fail, according to the research. The second most common major cause is an unbalanced experience or lack of managerial experience at 30%. Thankfully only 1% of startups fail due to neglect, fraud, or disaster.

In the end we need to make sure our investment dollars are going into a viable business. What determines a viable business idea depends on the people running the company, their management abilities and insights, as well as how the economy is growing. As long as a business is sustainable profitable then it can be considered viable. It appears startups in the information industry are the most likely to fail after several years. So in order to reduce our risk of investing in the wrong startups we should try to look for opportunities elsewhere first. This suggestion would be applicable to be equity and debt investments.

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