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