How Many Businesses Fail in the First Year in the UK?

Around 60% of small firms in the UK reportedly fail during the first three years of operation. From unicorns in the financial industry to creative university spinouts, the UK private sector is humming with ambitious entrepreneurs and scaleups.

Nonetheless, startup failures are still frequent, even within the high-growth ecosystem.

The success rates of the companies that we monitor on the Redflag platform are a frequently requested question.

We have looked at how many high-growth UK companies fail, scale, and exit within five years of incorporation as well as how many simply maintain their current level of growth without failing or growing.

We also assess which industries are most frequently linked to startup successes and failures, as well as the typical lifespan of businesses that fail or successfully depart.

Startup fail & exit rates in the UK

The startup ecosystem in the UK is vibrant, with a large number of new companies being formed each year. However, the journey from startup to success is a difficult one, and many companies fail along the way. According to data from Startup Genome, the failure rate for startups in the UK is around 60%, which is similar to the global average.

However, for those startups that do survive, the UK offers a strong environment for scaling up, with a supportive business culture and access to capital. The UK also has a healthy exit market, with many successful startups being acquired by larger companies or going public.

In fact, the UK has the highest exit rate in Europe, with an average of 7.3 exits per 100,000 people. While startup failure rates may be high, the UK remains a promising location for entrepreneurs and investors alike.

The data behind our analysis

We conducted an analysis on a group of private UK companies that were established in 2017 and were operating at the Seed stage. All of these companies had met at least one of our eight tracking triggers, which serve as indicators of high-growth or ambition.

We then evaluated the progression of these companies using our stage of evolution classifications, which include:

• Seed: start-ups that are new to the scene and have limited funding and employees.
• Venture: businesses that have been operating for a few years, with more established products/services and a valuation in the millions.
• Growth: profitable companies with multi-million-pound turnovers that have been operating for at least five years. They have likely secured multiple rounds of funding and are expanding their product offerings and international activities.
• Established: firms that have been operating for 15+ years or for at least five years with three consecutive years of £20m+ turnover or £5m+ profit.
• Zombie: companies that have had prolonged periods of inactivity or are believed to be close to the Dead stage.
• Dead: companies that have dissolved or have announced that they are no longer trading.
• Exited: businesses that have exited through an acquisition or initial public offering (IPO).

Despite being at the Seed stage, these companies have demonstrated the potential for high-growth and have progressed to different stages of evolution.

What proportion of companies scale, fail, exit and stagnate?

Out of the 2,582 private UK companies that were incorporated in 2017 and operating at the Seed stage, only 23% of them successfully scaled within their first five years, progressing to a later stage of evolution. Those that did scale up received an average of three equity funding deals, with a total value of £8.53m, compared to those that did not scale.

The increased investment received by the scaling businesses may have been due to their perceived superior product ranges, better metrics, or market readiness, and this investment likely helped these companies to progress faster.

While only 2% of companies exited the private market, either being acquired or undergoing an IPO, the vast majority of these exit events were acquisitions, with only four companies progressing from Seed stage through to IPO since 2017.

This is understandable, as most startups are unlikely to be successful enough to warrant an exit at such an early stage, and founders may be hesitant to hand over the reins before seeing their vision come to fruition.

On the opposite end of the spectrum, 20% of the companies failed to progress and ended up in the Zombie or Dead stages. These businesses had a meager average funding of less than £289k, with less than one equity deal each.

The fact that failed companies raised half the funding that stagnated companies did (£596k) and only a fraction of that raised by companies that scaled suggests that these companies were less attractive to investors, which could have contributed to their downfall.

It is interesting to note that out of the companies that scaled in their first five years, only 16 later moved to the Zombie or Dead stages. While the fate of these businesses highlights the risks of the high-growth ecosystem, the relatively low number of “scaled but failed” companies suggests that those who progress in the earliest years of development are more likely to succeed in the long run.

Approximately one-fourth of the 2,582 companies assessed successfully scaled within their first five years, reaching a later stage of evolution during this time. Unsurprisingly, those that scaled-up received more equity funding than those that did not, with an average of three deals securing a total value of £8.53m per company.

These businesses may have received more investment due to their superior product ranges, better metrics, or market readiness, which likely helped them progress faster. Out of the cohort, only 2% or 52 businesses exited the private market either through an acquisition or IPO.

The majority of these exit events were acquisitions, with only four companies moving from Seed stage to IPO since 2017. Most startups are unlikely to exit at such an early stage, and founders may be reluctant to hand over the reins before achieving their vision.

On the other end of the scale, 20% of companies had moved to the Zombie or Dead stages without progressing, and are thus classified as having failed. These businesses raised an average of just £289k and secured less than one equity deal each. Lack of capital made them less attractive to investors and impacted their chances of survival.

Interestingly, out of the companies that scaled during their first five years, only 16 later moved to the Zombie or Dead stages. This suggests that those progressing in the earliest years of their development are much more likely to succeed in the long run.

In our cohort, 54% of companies stagnated and did not progress beyond the Seed stage in their first five years, raising an average of £596k worth of equity finance. These businesses may have struggled to find the right market fit for their products or commercialize good ideas initially deemed viable by investors.

Additionally, national lockdowns and economic uncertainty due to the COVID-19 pandemic may have hindered the progression of many businesses early on in their life cycles. Current global economic conditions suggest limited growth across the UK private sector, which may result in more startups stagnating in the coming years.

Which industries have the highest business failure rate in the UK?

In 2022, the business landscape in the United Kingdom exhibited varying degrees of resilience, with certain industries facing higher closure rates than others. This data is sourced from the Office for National Statistics (ONS) and provides insights into the state of businesses during the challenging year of 2022.

Business Failure Rates by Industry in 2022

Industry	Failure Rate (%)
Transport and storage (inc. postal)	14.7
Business administration and support services	14.1
Information and communication	12.8
Finance and insurance	11.6
Accommodation and food services	11.4
Professional; scientific and technical services	11.3
Retail	9.9
Construction	9
Property	9
Education	8.4
Production	8.3
Wholesale	8
Arts; entertainment; recreation and other services	7.8
Health	7.2
Motor trades	7

Analysis:

• Transport and Storage: Topped the list with a 14.7% business failure rate, emphasising the challenges faced by this sector.
• Business Administration and Support Services: Closely followed with a 14.1% failed, reflecting the hurdles these businesses encountered in 2022.
• Information and Communication: Ranked third with a 12.8% closed, highlighting the industry’s resilience during the year.

These statistics provide a comprehensive picture of the business landscape in the UK in 2022, shedding light on the relative stability and challenges faced by various sectors. It’s essential to consider these figures when assessing the economic health of the nation.

Source: Office for National Statistics, 2022

Why do startups fail?

Here are the top causes of start-up failures, as revealed by a survey by CB Insights:

• 38% – Ran out of cash or failed to raise new capital
• 35% – There was no market need
• 20% – Were outcompeted
• 19% – Had a flawed business model
• 18% – Regulatory or legal changes
• 15% – Pricing or cost issue
• 14% – Not the right team
• 10% – Product mistimed
• 8% – Poor product
• 7% – Disharmony among team or investors
• 6% – Pivot went bad
• 5% – Burned out or lack of passion

What happens to startups in the UK?

As the data reveals, early-stage startups are inherently risky, with the majority of businesses stagnating or failing within the first five years. While this may be disheartening for entrepreneurs and investors alike, it is important to remember that the UK’s high-growth ecosystem is a hotbed for new ideas, products and business models – and failure is a natural part of this process.

Although high rates of stagnation and failure could be alarming in other parts of the economy, here, it indicates that UK entrepreneurs are pushing the limits of what is currently achievable. While the COVID-19 pandemic has undoubtedly made growth more challenging for early-stage companies, the quest for a highly scalable business model is always challenging, regardless of the economic climate (some of the most successful companies today were established during the 2008-2009 financial crisis).

The 23% of companies that have scaled present promise for the future – as they are likely to produce thriving growth businesses, global innovators, and unicorns.

Conclusion

Starting a business can be an exciting and rewarding opportunity, but the harsh reality is that around one in five small businesses fail within their first year. This can be due to a range of factors, including financial issues, lack of market demand, and ineffective business models. Business failure rates can vary depending on the region and industry, with some areas experiencing higher rates than others.

Additionally, there are common problems affecting small businesses, such as difficulty accessing financing and managing cash flow. It’s important for aspiring entrepreneurs to thoroughly research their chosen industry and region, develop a strong business plan, and seek guidance and support from experts in order to increase their chances of success.