Yes, of course!

So I decided to change topics a little today because I saw a really nice article about business failure rates.

It really is interesting to read because it is ‘conventional wisdom’ that 80 or 90%¬†startup businesses “fail.”The original study is detailed in ”

The original study is detailed in “Entrepreneurship and the U.S. Economy” on the BLS website. Unfortunately, it only goes through 2010, but after searching around on the web for a bit, these numbers appear to be very steady since the 1980’s so we can hope they are still accurate today.

I’m not going to rehash the same information Ryan Jordan already wrote in his post, but let’s interpret this information further and think about what this means for all of us entrepreneurs who want to start a small business.

Why Do Businesses Fail?

Looking at the chart, I notice that the curve is very steep in the first two years, and then dramatically flattens out after year 3. To me, it means if you can get to year 3, you pretty much succeeded. Barring some unforeseen event (such as major economic downturn) you seemed to have figured out the recipe for success.

Before year 3, what are the major things that cause a business to fail? I cannot find any hard facts and numbers about this, but there are a lot of reasons why. I will list some of the most avoidable reasons.

Under-Capitalizing a New Business

This is the most avoidable reason businesses fail but also quite common. In a very simple statement – If you sink everything you have into starting the business, you will have nothing left to run it! You need to do a solid cash flow analysis and determine your break-even point and how long it will take you to get to break even.

Forgetting About Your Online Presence

The problem about online reviews is that people are more likely to talk about a bad experience than about a good experience. This was very apparent to me one time when my wife and I decided to invite a friend out on a double date. We chose our favorite high-end restaurant in our city and talked it up. The day of the dinner, I looked up directions on Google Maps and saw the

This was very apparent to me one time when my wife and I decided to invite a friend out on a double date. We chose our favorite high-end restaurant in our city and talked it up. The day of the dinner, I looked up directions on Google Maps and saw the

The day of the dinner, I looked up directions on Google Maps and saw the 2-star overall review! I began to second guess myself and I actually questioned if it was any good.

Perhaps my taste in restaurants was poor?

We went anyhow and it was amazing like I expected, but a non-regular may have chosen another restaurant instead. How much business does this place lose simply by ignoring its online Yelp and Google reviews?

Blinded by Your Great Idea

You think your idea is great, but others may not. Do I need to say more? Really, any idea you have, you should ask friends and family what they think about it. Ask potential customers/clients if they think the product or service is something they think is valuable. Do anything to vet your idea before you actually sink good cash into your startup idea.

Price Competition

There are really two ways price can kill your business. First, a major company may have economies of scale which allows them to sell their product at a lower price than you can even buy the product . It’s really hard to be a cheap furniture store when a Walmart is up the street selling the exact same cheap furniture for 30% less.

Another related reason is that you may be too focused on price and not focused on creating a valuable product your customers want. The majority of consumers are willing to pay a premium price for something they perceive as premium. Competing solely on price is a race to the bottom, but competing on quality allows you to set any reasonable price you need.

Should I Start My Business?

If you mitigate your risks by having a solid Education, Experience, and Planning, you can avoid being in the 1/3 of businesses that close within 3 years. Knowing that so many businesses close, I wouldn’t invest my entire life savings into one idea (if it is a significant sum). I think it is more prudent to spend 1/3 or 1/2 of your savings in one venture and save the rest for other investments or business ideas. This does not apply to super low-cost startups where a complete loss may only take a year or two to recover the investment.