Last week I came across an article which assessed the failure rate of start-ups around the globe which shared amongst other things

• 20% of  startups fail in the first year.
• 34% of startups close within their first two years.
• Just over 50% of businesses make it to their fifth year.
• Only 25% of businesses make it to the 15-year mark. 

(Source: Medium)

It pointed to the following rather inadequate or out of context reasons for why startups fail.

• No market need is the number one reason why startups fail. (Source: Failory)
• Marketing is another major reason for failure.
• Team problems are a contributing factor to startup failure.
• Little experience of CEOs and Directors is also a common characteristic of failed startups.
• Crippling cash flow issues also affect a startup’s profitability. As a result, over half of all startups operate at a loss.  (Source: Small Business Trends)

From my own experience of running a number of businesses and also hearing advising people who are trying to get their business up and running or growing profitably I would refine these reasons for failure and give some suggestions on how to overcome the odds of failure in any given circumstance.

1. The business idea (product or service) and model are not thought through properly.
2. Targeted marketing is not executed properly
3. The delivery operations of the business are not fully thought through.
4. Poor (or no) financial management experience or skills. 
5. No review processes to assess progress and if necessary implement corrective actions.

The Business Model

Lets take a look first at how a business model is thought through.  A business model is simply a way of describing how your business operates in order to generate revenue.  Think of Google for example.  They offer their service to everyone on the planet free because that access is paid for by advertisers.  Google collects your data on browsing habits, interests etc and in return, advertisers are happy to pay for that data in order to target you directly.  Everyone feels they get value for money and Google make a considerable amount of revenue.

For many people starting a business, they focus too much on what they do (or want to do) and are not focused enough on what the value of what they do or sell is to their potential clients.  In fact, many people who start businesses are not very sure who exactly the clients are that would value the product or service the most.  So often, it is not that there is not a market for the product or service, it just hasn’t been framed in a way that allows potential clients to find it or see value in it.  Working with clients I find that articulating this value is one of the hardest thing that any business owner can do, particularly if they offer a service rather than a product.  

What also needs to be taken into account in determining the business model is the idea of building a long-term sustainable business – frequently business ideas are led by trends that won’t work for the long-term future of the business.  For example, a café that sets up in a hip area of the City selling Wheatgrass shots may only last as long as wheatgrass shots are a thing.  To create a long term sustainable business may actually involve a “pivot” to packaging shots of wheatgrass in a form that could be distributed in large volumes and sold through numerous health food outlets, gyms etc while retaining the original store (or not) to provide branding and the story of origin. 

A business model is not just an idea - it is the frame on which the whole business hangs and it is really important to think it through and get it right before you start doing any other aspect of the business.   It is also something that needs to be revisited frequently as time changes  the technologies and the needs of the market.

Marketing

I learned a hard lesson in the value and necessity of marketing from my own restaurant – everyone who runs a small business has to become expert enough to be able to do their own marketing.  It is really expensive to outsource and often a third party can't articulate the real value, insights and passion you have for your product or service. If you were in any doubt about how essential marketing is, the current statistic is that 80% of a decision to buy is already made before the customer contacts a real person.  That means you have to have all your content out there to help the person make the decision to buy from you in preference to anyone else.

You need to know who your customers are, the type of language that will appeal to them, where they are hanging out (digitally as well as physically) and then you need to be able to build a brand that people can identify with, produce special offers and content that is of interest to them and more than anything else you need to be consistent in putting out marketing messages frequently so that you stay top of mind.  I didn’t understand this in my own restaurant thinking our reputation for quality and service was enough – it wasn’t and not investing cash and time in marketing was a big mistake – those restaurants close to me who did invest in marketing had more customers and higher revenues and presumably much less stress as a consequence.

It is worth repeating – you must put in the time and money into promoting your business if you want to get sales.

Delivery Operations of the Business

You can have all the great ideas and the best branding and marketing in the world but if you can’t deliver your product or service – on time, meeting the customers expectations in terms of quality and providing enough support to help them get started using it you are going to lose customers before you even start.  Nowadays, every business is reviewable and people are much more likely to post something negative or detail a poor experience of some aspect of the product, communication or service involved in the purchase before they’ll sing your praises.  The worst is that this kind of negative reviewing is rarely countered by any other customers saying great things about you. 

Every aspect of your product or service delivery needs to be thought through carefully – where and what the touchpoints with the potential and then actual clients need to be clearly identified, how you want the interactions to look and feel to the customer and the corrective actions that need to be taken when something goes wrong needs to be thought through also.

One of life’s great joys is having a fantastic customer experience – a miserable experience has ruined more than one business.

Poor (or No) Financial Management.

Many people starting businesses have next to no financial management experience of running a business.  Even though I had done a post-grad in Business Management I have to admit I still knew next to nothing about running the finances of the business.  Understanding the Profit and Loss and the balance sheet are just part of it.  Really understanding the finances of your business involves constructing daily, weekly and monthly tracking systems for cash, its sources, expenses, costs of doing business.  It does not mean handing a pile of scrappy invoices and receipts to your accountant every couple of months and hoping they will give you good news that you are earning loads of money and can easily pay your bills. 

In working with my clients, I have often been taken aback to realise that people don’t want to confront that running a business means paying attention to money.  They can tell themselves all kinds of different stories to justify not really learning how the money works in their business and it is a major mistake.  They don’t raise invoices in time, they don’t pay bills on time and they don’t make investments they should because they are afraid to spend money.  It happens the other way too – people raise invoices and then go on a spending spree !

It should also be mentioned that independent financial advice is a worthwhile investment and should be given preference over taking well meaning but possibly misguided advice from family and friends, many of whom also have no experience of running your type of business.

Review processes.

One of the big issues small business owners face is that have no-one to bounce ideas off, question their thinking or challenge their ideas and assumptions.  We all think better with other people around to help.  Review activities are such a normal (and possibly overused) feature of life in large organisations but they can be relatively rare in small organisations.  It can seem so silly to spend time reviewing your business model, looking at your figures or measuring the impact of marketing and customer service activities when there is real work to be done!  Unfortunately, this lack of review can lead business owners to miss crucial clues as to where activities are not being effective, a business model needs to be tweaked or changed, marketing messages are not hitting the spot and finances are going awry.  By the time these are found out it can be too late – cash has run out and you have lost the business.

Again, for small business owners, if you struggle to review on your own, it really is worthwhile to invest in a professional service that can help you cast a cold eye over your business and can help you take the necessary steps in time to make a real and significant difference to the long term viability and profitability of your business. The good news is that once you have learned how to do it properly you will come to rely on the information this generates and can use it to make clearsighted decisions about the future of your business based on considered experience.   Oddly it doesn’t make people risk averse, but gives them real confidence in their decision making.

Conclusion

If the state odds are 50-50 that your start-up business will make it, you can dramatically change those odds in your favour by getting a few things right from the outset.  Don't leave it to chance - take the right steps early.

If you need further information or want to explore further any aspect of how Pathway Consulting can help you build a profitable business, please email ahealy@pathwayconsulting.ie.