Why most startups fail within the first few years?

The data is stark and the reality even more so. Most small businesses in Australia will fail in their first few years of existence. So how can small businesses avoid failure and, better still, make a great product or idea a commercial success?

Firstly to the data

In May 2012, the Reserve Bank of Australia (RBA) published a report titled ‘Small Business: An Economic Overview’.

The good news is the report shows that in 2011, 96% of the 2.1 million active business in Australia were small businesses (with less than 20 staff) and accounted for nearly half of all employment. Clearly small businesses are and will continue to be critical to Australia’s economic prosperity. Logically, small businesses knowing how to build sustainable success must be even more important.

The bad news is that survival rates for small businesses are very poor. In the period 2007-2011:

  • 60% of sole proprietor (no staff) businesses failed;
  • 40% of 1-4 person businesses failed;
  • 35% of 5-19 person businesses failed; and
  • 40% of small businesses were not profitable

Why do they fail?

Why then do small businesses fail so consistently and how can they ensure success or at least minimise the risks which cause failure?

In my view, the greatest single driver for small business failure is the absence of basic commercial management skills.

Most small businesses are started by people with:

  • a great idea; or
  • a skill in a specific area, e.g. a cook or a software developer or a boat builder; or
  • raw passion, boundless energy and a desire to create something of value.

More often than not they jump headlong into their venture with little or no planning, work tirelessly and relentlessly and wake up several years later with nothing to show for their immense efforts and ultimately blink in the harsh light of day and wonder why they failed.

Almost all small business owners have no idea how to:

  • assess the financial viability of their idea or write a simple business plan;
  • create a simple financial model or manage cash-flow;
  • develop or manage a budget;
  • write a sales and marketing plan ;
  • put in place simple legal agreements to protect their assets;
  • protect their Intellectual Property (IP); or
  • attract and manage staff

Nor do they usually realise the enormous burden of regulatory compliance that is imposed on all businesses large and small in this country. The difference being that large businesses can share the burden of compliance across a much larger revenue base – in other words it is a much smaller percentage of the total cost of running a business.

Tips for success!

think-big-start-smallStart with the basics
Having a vision is only one piece of the puzzle.

Having run several small businesses and mentored and worked with half a dozen small business owners this last decade, I’ve made mistakes and learned many of the lessons which weren’t shared with me while I studied for an MBA.

For what it’s worth, here are a few simple tips on things to do or to keep in mind before starting a small business.

Find a business mentor. I know this sounds an unnecessary burden, however it may just be the single most important thing you do to ensure your success. Business mentors have ‘been there and done that’ and will quickly identify issues and find solutions to challenges that you might take months or even years for you to figure out – and you might be out of business by then.

Talk with other owners and find out what it takes to run a small business from the ‘horse’s mouth’ so to speak. If they operate in a similar industry all the better as you’re likely to hear about issues which are unique to your type of business.

Write a business plan! Too hard? Don’t know what this is? Can’t find the time? If you answered yes to any of these questions then don’t start a small business. Seriously! If you haven’t taken the time to understand the size of your potential market or your key competitors; developed a simple budget to help you understand the financial indicators of success or failure; or figured out how to sell and market your product or service including assessing the need and value of a website and social media tools; to name just a few of the key elements of a business plan, then you’re more likely to fail than succeed. Do you really want to waste years of effort and money?

Make a budget. This is critical and will help you in so many ways. For example it will allow you to: know on a daily, weekly or monthly basis if you are making money (a profit) or losing money (a loss). Unless you have a large stash of cash under the bed, making losses month after month is not sustainable; adjust your operations, for instance reducing your cost base if sales volumes don’t eventuate; adjust your strategy, for instance implementing a social media marketing campaign or launching an improved product; or anticipate the need to hire new staff because you can see sales ramping up – thus maintaining customer satisfaction and ensuring even more sales success.

If at all possible use others to do the stuff which is non-core to your business. Use a book-keeper, use crowdsoucing services to get things done cheaply and quickly (like doing data entry). This will allow you to concentrate on the core aspects (making quality products, offering valuable services, thinking and planning) which will make your business a success.

Use some of the valuable tools and resources which are freely available. One of the best free resources for small businesses is the NSW government small business toolkit website called SmallBizConnect. It has masses of helpful videos, checklists, sample documents and great advice. If you find the site too hard, complex or just plain overwhelming then maybe you need a mentor to help you along. Mentors can be found via the site and I’d suggest this as a great starting point.

When it all gets too much – Small Business Mental Health

After all the business advice, I need to say one final thing about running a small business. It’s hard and it can take a toll not just physically but also mentally. Many small business owners work in relative isolation and have no-one in their organisation to turn to for help. Financial stress in particular is a major reason behind the mental breakdown of many small business owners. So be vigilant and look for support.

A good starting point is the free resource kit and DVD from the research program Business in Mind. Sponsored by the University of Tasmania, the Griffith University and mental health organisation Beyond Blue, it allows SME’s and their staff to understand the importance of mental health in the workplace and access support services.

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Written by

Strategy Manager at EmpireOne, Craig has a critical look on businesses and their technologies. After years in the media, artificial intelligence and insurance and risk management sectors, his knowledge, skills and experience have positioned him perfectly to advise and put businesses on the right path.