Top 3 reasons why new businesses fail
If you want to start a new business, the odds don't look great for you - depending on the report you read, 85% to 95% of start ups fail within the first year. This made me reflect on my professional experience and how this success/failure statistics relate to all the businesses I worked with.
First of all, in my experience, the success rate of new businesses was a lot higher than 5-15%.
I don't really count it a start up when a group of friends come up with an idea over a drink and registering for an ABN is as far as it goes.
The start of the business is when some money and/or other resources are actually committed to an idea, for example a trial order is processed, some equipment is purchased, developers hired etc.
I also think that the success rates that I came across in my career are much higher because I had a very low percentage of tech start ups as clients. If I was to isolate tech start ups, 95% failure rate will sound about right. So below is my five reasons why new businesses do not succeed:
#1 Not Knowing Your Product
When we talk about more traditional businesses, a lot of the time they enter at least somewhat established markets. What I mean is, if you are thinking about opening a coffee shop, you should be pretty aware that your main product is coffee and I'd expect you to have a pretty high degree of understanding of what makes a good coffee.
You'd be surprised how many people decide to start a business without having any expertise in the main product or service that they want to deliver to their customers.
Below are just a few problems that a caused by not doing your homework:
- You don't know whether your product is of high or low quality.
- You don't know whether the product is suitable for the market you target.
- Your supply chain might not be adequate for the product you're trying to make.
- It's pretty hard to give directions to your team if they know more about your business than you do.
“One of the best starting points is connecting with people who are already in the industry.”
So , how do we get to know the product and our market? One of the best starting points (and a very overlooked one as well) is connecting with people who are already in the industry. Want to open a coffee shop in your suburb? Try to reach out to the businesses out of your direct competition and ask them how they are operating. You'd be surprised how much people enjoy talking about their business and as soon as you make it clear that you're not a threat to their revenue - they'll be happy to chat to you.
Make sure you have at least a few options before you go ahead with the decision. The most advertised supplier might not be cheapest or overall most suitable. Just because one of your friends said a particular location is very convenient, doesn't mean it will be convenient for the majority of your customer base.
#2 Having Unrealistic Expectations
There are two main paths by which people arrive to the decision to open their own business. First is reaching the dead end on their career path and essentially opening a similar business to the one they were working for. Second path is getting fed up with whatever they were doing before and having a career and lifestyle change and do something they are passionate about. The common phrase from both types - I want to be my own boss.
Fewer than 30% of new business owners have any realistic expectation of what it means to be your own boss, the amount of hours they will have to spend to get the business off the ground and the full range of tasks they will have to do. And while you might have a passion for making and selling beautiful hand made jewellery, this might not translate into bookkeeping, dealing with the banks, creating marketing campaigns etc.
“People want to be their own boss. Less than 1 in 3 new business owners have any realistic expectation of what it means.”
Many psychologists agree that unrealistic expectations are a primary cause of a relationship breakdown. The same goes for your business - the further your expectations are from reality, the harder the reality might hit you.
One way to deal with that is..., well, do your homework. Engage with other business owners in your area through a local business chamber or council and usually they are happy to answer these sort of questions. Also, talk to your accountant about the benchmarks for the industry. Accountants quite often have access to such subscription services and should be able to give you a pretty good guideline .
#3 Lack of Support Network
This is probably one of the biggest factors and also potentially the hardest to change. Starting your own business is something that will not only affect you, but also many people around you - your partner, kids, friends, parents etc. So it's very important that you start your business by giving proper consideration to them and make sure they are on board as well. And you know what? They might not be able to support you at this particular time, but it's a good idea to communicate clearly what change it might bring to their life.
“Owning a business can be a very lonely affair.”
Owning a business can be a very lonely affair. You might feel like everything has to be done by you and all people who surround you want something from you. Did you notice how many times the word "you" appeared in the previous sentence? Guess what? Some good news - you don't have to do everything yourself and there are plenty of people like you. Make sure you have a good supportive accountant who isn't just going to do your taxes and see you once a year. Make sure you have a trusted legal adviser - this can take a lot of stress off you. Make sure you connect with your local business community - join your local business council, go to networking sessions, attend industry conferences.
“Networking is one of the most important business skills, yet very few people are good at it.”
I'll address networking in one of my future posts because this one of the most important business skills you can have and very few people are good at it.
The above are my observations and experiences from dealing with hundreds of businesses and they are too common to just be a coincidence. What do you think? Were any of the above issues a concern for you when you started a business? Would you like a bit more detail on any of the topics raised above? Let me know in your comments or use the contact form to say hello!