Why is there an 80% failure rate for new start-ups?

Image of a lady closing up her business

It is well documented that the success rate for a new start-up business is not great.   Out of 10 businesses who launch this year, only 2 of them will still be trading three years from now.

What’s more is that only 1 of those 2 businesses will successfully manage to have a longer-term future! So why is this?  Why, when we have access to so much information, knowledge and entrepreneurial support, do business struggle to build momentum quick enough?

This article explores this issue, to try and explain some key areas where small start-up businesses could give themselves a better chance of success.

Entrepreneurs….a special breed

In an article published a few years ago a study showed that 64% of the UK workforce would like to set up their own business, and 83% of 18-24-year-olds dream of self-employment.  However, in reality, less than 20% of people ever take the plunge and go for it.

So why do more people not just go for it?  Reason listed include outside forces (like Brexit), fear of competition, fear of failure, worried about not being qualified enough or having the relevant skills, financial concerns, family concern,  fear of stress, and lack of confidence.

The flip side of this is that those who do set up their own business must have more confidence, are more risk takers and don’t worry about things that are not in their control.  All of these are positive traits which you would think should put them in good stead, so where does it most commonly go wrong?

Reasons why start-ups may fail

bad idea text head with crumpled yellow paper head drawn chalkboard

The Concept

There is a fine balance between confidence and over-confidence.  Someone who is overconfident can “wade in” regardless, even if their business concept or model is fundamentally flawed.

There will be a small percentage of start-ups who should have never started-up in the first place.  You will have seen some of these on Dragon’s Den.  Terrible business concepts that should never have seen the light of day, but the entrepreneur behind it was convinced it was a good idea.

Not enough budding business owners sense check their business plan with an independent advisor who can really prod their model to make sure they have considered everything.  If it looks like a lemon and smells like a lemon….

Skillset

Hand of a businessman wearing multiple finger puppets

Starting a business is easy.  However building a business is difficult.  Most people who start their own business are not aware of the wide range of skillsets that are required.  Anyone  starting a business on their own are going to be wearing a lot of hats.  Managing Director, sales, marketing, finance, purchasing, operations, customer services, IT etc.

No-one has all these skills.  Start-ups need to work out what their skill gaps are early and plan on how they are going to plug those gaps – recruit, outsource, train or a mix of all three?

If they don’t start to plug these skill gaps quickly, then the business could really begin to struggle before it has started.

Pricing

Pricing is a sensitive area that many start-up businesses struggle with in the early stages.  Obviously, they want to attract clients quickly, so it is natural they want to charge really competitive pricing in order to build up a bank of happy customers.  Usually, what this means is that the business owner is stretched too thinly and not generating enough cash to grow the business. 

Time is a finite resource and, if business owners are undervaluing their time, it can end up with them working extended hours (evenings and weekends) just to keep the business afloat.  Not enough planning goes into benchmarking against the competition and also into understanding costs to ensure that the product or service is priced correctly with acceptable margins. 

It is key to balance returns with effort.  If the balance isn’t right – the business owner will either burn out trying to make enough to survive, or the flip side is that they may price themselves out of the marketplace.

Marketing

A lot of start-ups are built around a passion, interest or specific skillset and there can be a naivety around a “build it and they will come” mentality.  This rarely happens.  In order to attract prospective customers to a business offering, it needs to market to them effectively.

Remember this is before we even come to selling (which is another skillset that is required).  However if they can’t hook in prospects to express an interest in their product or service, they are not going to have anyone to sell to.

When we talk about marketing, we are not just referencing to promotional activity, but to a coherent marketing strategy which joins up all the dots between the offering, its’ audience, its’ positioning, the correct marketing channels and the messaging.

Unfortunately many start-up business owners often rush straight to marketing activity, without taking the time to consider the wider marketing strategy.  They see it as an unnecessary cost, which they would rather invest directly into marketing activity.  This, however, is a false economy, as the activity will never generate the returns that a coherent joined up approach will.  It is also a double whammy, because as well as not delivering returns, it can end up being an expenditure which drains cashflow.

Investment

Everyone starts up their business for different personal reasons.  Some people seek the flexibility of a lifestyle business, others are focussed on filling a gap in the market, whilst others want to ambitiously grow and take over the world. 

The issue with the latter is that it requires inward investment in the business at the right time to increase its’ capacity to make more money.  Business owners who fail to identify when to upscale resources, in order to grow, often find things going backwards.  Whether it is new equipment, larger premises, additional staff, technology, professional support or more working capital, if businesses don’t inwardly invest at the right time, they often find themselves struggling to compete.

Man increasing production capacity to the maximum by turning a control knob.

Messaging

Inherently linked with marketing, poor messaging can often signal the death knell for many new businesses.

The elevator pitch is a good exercise for businesses to try and perfect.  If they can concisely get across what their business does, why it does it, and who they do it for in under 30 secs then they are in a good place.

If, on the other hand, they struggle to communicate clearly what their business is all about, then how are they going to attract customers.  Simplicity is key.

Confusing messaging is a rock in the sales and marketing pipeline.  Too many SMEs never nail their messaging.

In order to really nail messaging it helps to get an outsider’s perspective.  They will see things from the outside inwards.  There is no assumed knowledge.  They can reflect back what the outside world is seeing and hearing. 

Most business owners can’t see the wood for the trees as they are too close and emotionally involved. This doesn’t help when trying to communicate with the outside world.

Support

Having the right support network around a new business is critical to ensure momentum is maintained.  All business owners are going to face many challenges and obstacles and they will need to call on the outside perspective of others to advise, support and just keep their mindset positively focused on solutions.

Obviously, friends and family members are a great resource, but professional support in terms of business advisors, consultants, mentors, coaches, peer boards etc can really make the difference between business success, and giving it up and jacking it in.

Running a business is really rewarding, but it can have its darker days as well filled with pressure and tough decisions.  Those business owners who never prepare for how they are going to face these challenges will typically find them too hard to overcome.

Graphic depicting a female mentor providing a solution to a problem

Summary

Obviously, there are many more reasons why 80% of SMEs don’t survive past the early years.  There are external factors that are beyond control – such as the state of the economy, the competitive landscape, legislation changes and personal challenges (family trauma, health issues etc).  All of these can have a negative impact on a young business.

We feel, however, that the seven reasons identified in the article are the most common factors.  With an awareness of these at the start of the journey, would hold any new business start-up in much greater stead and make better decisions.

Who knows, it could even be the key to ensuring that they remain one of the successful minority.

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Ian is the founder of Opportunity Marketing marketing, with over 18 years of experience in successfully setting up marketing departments, creating marketing strategies and implementing these strategies across a wide number of SME companies in both the B2B and B2C sectors through a variety of channels.
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