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Article by: Morningside Accountant - David Roberts

We all know the depressing statistics about new business failure rates: Something like only one in ten is successful, something like half don’t make it past year one etc. etc.

So, why is that? Much has been written about it and more than 50 reasons for business failure have been identified. In this article I’ve tried to uncover the most common causes for success and failure.

In looking for statistical based studies I came across Bill Gross, an American who started the Idealab which specialises in start-ups. He analysed more than 100 of his own successes and failures and a further 100 from the US market. He broke his analysis down into five factors which yielded the following weightings when it came to reasons for success and failure: Timing (42%), Team/Execution (32%) Idea (28%) Business model (24%) Funding (14%) However, we need to be a little careful in taking these statistics at face value because Bill is a “professional” when it comes to start-ups and I guess most were relatively big, well planned and well funded at the outset.

The “Timing” he refers to is linked to the “Idea” in that it relates to the timing of when the “Idea” was taken to market. A business idea that has failed can be launched at a later date with great success. In other words, the market has to be ready for the idea. Understanding the market is clearly key and comes out strongly in all the studies that I’ve read. More about that later.

Taking a step back, the first test that I think any wannabe entrepreneur needs to take, and pass, is what I call the “personality” test. The foremost reason for success or failure in a start-up relates to the entrepreneurs themselves. In a nutshell, I believe they have to possess or nurture certain characteristics which come out strongly in all the studies that have been done. Most of these are also confirmed by my personal experience from the businesses that I have started. These are:

  1. Have an appetite to take calculated risks.
  2. Be prepared to make short-term sacrifices.
  3. Be prepared to work hard (much is made of being “passionate” about what you do, but what I think that really means is when you’re passionate about what you do, work becomes fun. This of course is the ideal, but is not always attainable).
  4. Be determined.
  5. Be persistent.

The entrepreneur should be prepared for a bumpy ride, to take the rough with the smooth, and to dig him or herself out of some big holes - some of which will have been self-made. Most successful business owners acknowledge that they tasted the bitter pill of failure prior to the sweetness of success. Resilience is a pre-requisite.

It should be borne in mind that the first phase of most start-ups is survival!

I think it helps to have an optimistic outlook. In the words of Albert Einstein: “Stay away from negative people. They have a problem for every solution.”

Beyond the entrepreneur’s “personality”, there is general consensus amongst most commentators that the following factors are closely linked to start-up failure:

  1. Lack of market demand for the product or service (linked to a lack of understanding of the market)
  2. Bill Gross’s point about “Timing” is that the market must be ready for the product or service for there to be a demand.
  3. Competition not researched
  4. Poor planning
  5. Poor management (linked to inadequate business knowledge and experience and poor people management skills)
  6. Inadequate marketing (linked to weakness in communicating the business offer and weak internet presence)
  7. Bad location (applicable mainly to retail)
  8. Insufficient funding
  9. Poor business model (linked to poor cash flow generation)
  10. Poor financial management
  11. Expanding too fast.

In terms of success criteria a few interesting points stand out from an article published by Successharbour:

  1. Direction – the entrepreneur needs a clear idea of the end mission and how the company needs to get there.
  2. Financial savvy – start-ups need to know how to work within a budget and manage their finances. A young company needs to carefully manage debt. In fact, they need to do more with less.
  3. Well-connected – the old adage “it’s not what you know but who you know” applies. Many successful young businesses use their social networks to attract clients, investors and mentors.

There are some unique features to the South African start-up scene spawned as an aftermath of apartheid and the government’s BEE policies.

In a recent article Ravi Govender, Head of small Enterprises at Standard Bank, said: “One of the main reasons for the premature failure of small businesses in South Africa is that they started as survivalist ventures. It is almost inevitable for them to fail because their owners do not have the skills, experience or resources to build a sustainable business.”

He goes on to say that poor planning, limited access to finance, business inexperience, lack of financial expertise, poor stock and cash flow management and the failure to differentiate between company and personal accounts are the main problems. Of course, the majority of our population was excluded from operating proper businesses prior to 1994, so the lack of skills and business savvy amongst some sections (although certainly not all) of Previously Disadvantaged Individuals is not surprising and clearly needs to be addressed. Hence the greater need for mentors and consultants.

At this point I think I should mention the dangers highlighted by commentators of trying to emulate entrepreneurs like Bill Gates, (Microsoft) Mark Zuckerberg (Facebook) and Richard Branson (Virgin) who all dropped out of college. The truth of the matter is that they were all exceptionally talented individuals with unique abilities. Most of us need all the knowledge we can get and although a university degree is definitely not a prerequisite for being a successful business person, most successful people have a real hunger for knowledge and look to hone their skills.

I must mention the uniquely South African phenomenon of the Tendertrepeneur. There’s no doubt that the current BEE policies can have a positive result for entrepreneurs and, if handled correctly, could form the basis for a successful business.

Unfortunately, empowerment sometimes gets confused with enrichment and government tenders are seen as an easy means to make money without adding value. Getting the tender becomes the end in itself while, often, another established business does the real work. I feel that start-up entrepreneurs should definitely consider government tenders as a means of getting started but should then concentrate efforts in establishing ongoing businesses that add value.

The good news is that most causes for start-up failure are avoidable!

Some quick suggestions of measures that can be taken to lessen the risks of failure: Do your homework on the market. Most importantly, define who you want to buy your product or service and be sure there is a demand for it. In a crowded market you’re going to have to differentiate yourself – how are you going to do this? Obviously you need to understand your competition - what they offer and how they operate. Have you got a business model which shows a clear path to generating cash?

In summary, be confident of a positive outcome before you commit – yes, you need to take risks but they should be calculated.

Do a proper business plan that you understand and is meaningful to you. It should include a proper marketing plan which, in today’s age, should most probably incorporate digital marketing and, where appropriate, social media activities. It should also tell you how much money you need. Bear in mind that because of the high failure rates it is very difficult to obtain funding for start-ups and you’re going to have to put some of your own money into the business. It’s pointless starting a business without the necessary capital or at least having a realistic plan on how you are going to get it. Bear in mind, you normally need more than you initially plan.

Business plan outcomes should be measurable so that you can gauge progress. You will need a reporting system.

Limit your financial risk. This means keeping fixed overheads like leases and capital expenditures on items like vehicles to a minimum. Focus your energies on generating income and most of what you spend should be to this end. Owner salaries should be kept at a minimum and you shouldn’t confuse personal expenditure with company expenditure. In the early days of establishing a business every cent counts!

Be quick to adapt. The business environment is dynamic and fluid which means that plans may need to change. When going into a new venture you most probably won’t know all the answers and your business plan may need modification. Re-visit it and update it to make sure it remains relevant and that you stay on track.

Keep track of finances and make sure you’ve got the basic systems in place to tell you where the money is going and what it’s doing. Minimise what I like to call the “black hole” where losses (caused by expenses exceeding income) go – that money disappears for ever!

Get expert advice. To do this you need to make some considered appointments:

  • A banker who is sympathetic to the needs of a small business and is going to give you good advice and service. In the short-term, they most probably won’t give you funding but you need to start building a relationship for the future.
  • An auditor or accountant who is affordable and is going to give you solid personal advice on systems and financial management.
  • A consultant to help you with a business plan. The trick here is to find an affordable one that involves you intimately in the process so that, at the end of the day, it’s YOUR plan.
  • A consultant to help you identify and get creative with funding opportunities. Besides the various specialist commercial funding options available maybe you can qualify for one of the many government schemes and/or qualify for an Enterprise Development Programme. They can help you with funding advice well into the future.
  • Depending on the nature of your business and your own knowledge of digital marketing consider appointing a digital marketing agency or person if you can afford it. Obviously, you should monitor cost effectiveness carefully.
  • It’s always tempting to avoid spending money on expert advice but the facts surrounding start-up business failures speak for themselves. Proper advice early on could spell the difference between success and failure.