Not enough dot com failures

I ran across a really interesting article at strategy+business by way of Businesspundit. The article’s premise is that there weren’t enough failures during the dot com crash:

The 50 percent failure rate of the dot-com era still seems high, until we put it into perspective. Compare the dot-coms to other business realms: From 1996 to 1998, for example, the survival rate for independent restaurants open for three years ran 39 percent.

…the low failure rate indicates that too few entrepreneurs were funded and too few new ventures launched. Had twice as many been launched, the short-term failure rate for individual businesses might have been higher, but a larger number of successful business models would probably have emerged, and these would have led to more enduring businesses in the long run.

It was really easy for all of us to scoff at the dot com companies that crashed, dismissing them as being doomed from the start. And I have to admit, even now I regularly find myself shaking my head at some of the new startups I see profiled on sites like Techcrunch, and wonder if we’re on the verge of seeing history repeat itself.

But what if that’s just part of the circle of life in the business world, and we’re not really trying out enough “stupid” ideas? If the article is right, the mathematics suggest that web entrepreneurs as a whole should risk trying out even more ridiculous ideas, saturating the market in order to figure out the best business models.

When you think about it, how much more stupid is it to start a new Flickr or YouTube competitor today as it is to open a new coffee shop, casual Italian restaurant, or ice cream stand?

If the statistics are right, it suggests that either the market for web-based businesses is under-saturated or the failure rate is just lower than brick-and-mortar companies. Either way, that’s good news for would-be web entrepreneurs.

(By the way, if you’re on the fence about whether or not it’s the right time to move forward with your business idea, make sure to read Paul Graham’s excellent essay on why to not not start a startup.)

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