Companies in their teens are thriving - December 05, 2018

Companies in their teens are thriving

The world of successful companies is changing fast. The average age of an S&P500 company is now 18 years. In 1950 it was 60. But not all young companies thrive: most of them fold before they can celebrate their 6th birthday. We investigate how companies develop and what age means to their success.

In the last decades, many things changed in the league of the most successful companies. Old companies are facing problems, while corporations that didn’t even exist one or two decades ago now are among the wealthiest. Although relatively new companies are coming up, being under 5 years can still be considered a great risk.

Teenagers are strong

Companies in their teenage years are striving lately. According to a Credit Suisse analysis, companies listed on the S&P500 are getting younger. In the 1950s their average age was around 60 years, but now they’re under 20 and this trend may accelerate.

Average lifespan of S&P500 listed companies in years

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This acceleration is due to companies like Amazon, Apple, Google and other tech-related corporations. Credit Suisse points out that the main reason behind this disruption is automation, which hit several traditional industries badly. Another paper also points out that half of the S&P500 companies may change places in the next 10 years. “The 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016 and is forecast to shrink to just 12 years by 2027”, writes Innosight.

Hard to come of age

Companies from 10 to 20 may have a good time, but it’s not easy to reach an age that is above 10 years. According to the data of the U.S. Bureau of Labor Statistics, 50% of companies go bankrupt before they can celebrate their 6th birthday, and less than 40% of them goes above 10 years.

Survival rates of companies compared to their age in years

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What’s more, this statistic seems to be true at any given time, as it can be seen in the chart above. It’s also interesting to see that the number of companies established in every year seems to be constant. The same is true for the number of companies that fold. This data isn’t really changing with economic conditions and appears to be the same even in harder times like the financial crisis of 2008.

Age still means stability

Although companies in their teens are taking over the S&P500, old corporations aren’t failing. The reason is that although new companies emerge, older ones aren’t always go bankrupt or stop operating. Many changes on the mentioned index is due to mergers for example where new and bigger companies born.

It’s also true that the older a company the more stable it is. It’s clear from the U.S. Bureau of Labor Statistics’ data that as companies are getting older, their tendency to go bankrupt is falling rapidly. While only around 78% of companies survive their first year, more than 96% of companies older than 10 years continue operating every year and this data remains roughly the same through time.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.