Question: I believe I have a sound business idea, have done focus groups and am working on the business plans. But I find the percentage of start-ups that fail very disheartening. Is there any way you can identify the reasons for the failures of these start-up businesses?
-- Mary Liebetrau, West Bend, Wis.
First, understand that many of the studies cited about start-up "failure" rates actually pertain to business closures, which sometimes aren't failures at all. A business may have closed because its owners retired or sold for a profit.
But your question of why many start-ups do fail is still intriguing, because many do. Much of what is believed about the failures is anecdotal, but a few studies have tried to better quantify the reasons.
A mid-1990s study by researchers at the University of Texas and Harvard University tracked 3,377 nonfarm businesses that filed for bankruptcy in 1994. When interviewed, the largest percentage of owners, 38.5%, said that "outside business conditions" such as new competition in their market, led to the demise of their businesses.
Financial difficulties, including high-debt service and inability to get financing were cited by 28% as the major cause, and "inside business conditions" such as a bad location, loss of major clients, and the inability to collect outstanding payments were mentioned by 27.1%. Reasons less commonly cited included tax problems, disputes with creditors, and personal issues such as divorce and poor health.
A study of closure data by the Small Business Administration found that the two factors with the greatest correlation to a business's chance of survival were having $50,000 or more in start-up capital and being an employer, which essentially means hiring outside workers.
Another survey conducted in 2000 in Wisconsin found that small-business counselors and financing experts see businesses fail most often because of poor cash-flow management, undercapitalization, failure to write a business plan, and improper pricing of services.
From the various surveys, the most common problems appear to be lack of adequate capital and being ill-prepared. Keep in mind, though, studies about failure tend to have some problems.
For one, outside analysts might come up with very different reasons for businesses' failures than the owners themselves.
As published in The Wall Street Journal, November 7, 2006