Many people start businesses because they have a great idea, and they hope that great idea will take off and (maybe, just maybe) make them some money.
However, (and we have all heard this statistic before) 70 percent of all businesses fail within 10 years. But this is not the interesting part of the statistic. There is more.
- Four-fifths (80 percent) of new companies survive their first year
- Two-thirds (66 percent) survive their second year
- About one-half (50 percent) survive their fifth year
But by year 10, only 30 percent will have made it.
It seems that this might have less to do with the business climate (the numbers stay consistent through recessions and recovery periods). In most cases, a business’s failure comes back to decisions that founders and their executive teams make.
Jessie Hagen, an SBA and USDA specialist, looked at a large number of business failures (in many different industries and geographies) and developed a comprehensive list of why only thirty percent of businesses last longer than a decade. Several of the reasons include:
General Business Factors
- 78 percent—a lack of a well-developed business plan, including insufficient research on the business idea before starting the company. This can snowball into a variety of issues, including that there just simply might not be a market for the product or service, or (if there is) that the business model will not scale.
- 73 percent— being overly optimistic about achievable sales, money required, and what they need to do to be successful. Now small business owners are an optimistic bunch, but optimism can be taken too far. There needs to be a healthy balance between optimism and realism as the company starts to exponentially grow.
- 70 percent—not recognizing (or choosing to ignore) what they don't do well and not seeking help from those who do. Delegation and humility fit together like bread and butter.
- 63 percent—insufficient relevant and applicable business experience. Do what you know, and if you don’t know the market, customers, or business model of the industry you want to break into/improve, investigate the possibilities of working in that industry for a bit to get some experience under your belt.
- 82 percent—poor cash flow management skills/poor understanding of cash flow. For small and medium businesses (SMBs), cash and working capital is king. Revenue is important, but if you do not have the money to keep the lights on, pay your vendors, and issue paychecks, you will not survive. And if you are unable to recognize that finances are not quite your thing, and refuse to bring on a qualified financial expert, you will fail.
- 79 percent—starting out with too little money. Again, cash is king, and you need to have an adequate amount of money to cover the bills, salaries, and expansion issues. We have heard stories of successful companies who started out because the founder maxed out his/her credit cards. But have you also heard that the majority of those companies also failed? The old adage is true; it does take money to make money.
- 77 percent—not pricing properly and failing to include all necessary items when setting prices. What you sell your products/services for is the basis of your business. If you do not make a healthy margin, you run the risk of commoditizing your offering (in the eyes of the customer) since the only way you will be competing is price. And price is the easiest way for competitors (with deeper monetary pockets) to crush you.
Sales/ Marketing Factors
- 64 percent—not promoting the business properly. Growth plateaus happen for a variety of reasons. A big reason is that once you have sold to everyone in your phone’s contact list, you will likely run out of net new sales. Now the hard work will begin. You need to reach out into a population that does not know you or your company. You will have to promote yourself.
- 55 percent—not understanding who your competition is or ignoring competition. In addition to knowing your competition, you also need to understand why their loyal customers are loyal. This will provide insight on how to grab market share. For example, if your competitors’ customers are not price sensitive, then having a BOGO sale is not going to work.
- 47 percent—too much focus and reliance on one customer/client. Are you too dependent on just a few customers? If 50 percent of your business comes from 30 percent (or less) of your customers, it is time to promote your business and expand your customer base.
Human Resource Factors
- 58 percent—inability to delegate properly; micro-managing work given to others. In order to scale your business, you have to delegate. You cannot have relationships with all your customers. You cannot personally hire every employee. You cannot negotiate every contract or sales agreement.
- 56 percent—hiring the wrong people. Many founders make the big mistake of hiring people who are clones of themselves or hiring friends and relatives. Sycophants and innovation (and growth) do not mix. You need people with other viewpoints, different experiences, different backgrounds, and complementary skill sets. It may be harder, but the results can be spectacular.
Something happens between year five and year 10 within growing small and medium businesses. It gets harder and harder to find net new customers. It becomes obvious that the business model will not scale to find those net new customers. Cash flow may become a huge problem. And, finally, management may not be able to make the transition from start-up to established company. It does take a different set of skills to make that shift.
Now this list is not designed to decimate peoples’ desires to start their own companies. It is intended to highlight common traps that are easy to fall once executives get comfortable with their growth and have to start managing a very different type of company than the one they may have started in their living room. So take a look at this list, and look deep within yourself. How many of these mistakes are you making?