90% of startups fail… NOT!!!

Somewhere in conversation this statistic seems to come up with a rather depressing frequency, particularly given my decision to quit my current job and well, form a startup.

Some research was needed to quantify this a little further.

I’m yet to fully quantify this. What I do find is that certainly small business do fail. That seems pretty unequivocal. Yet how many fail in their first year, in their second, fifth or tenth year? What does failure mean? For example, if a business “sells out” after five years, that appears to be a failure, but for an IT startup would be a success.

This was clearly backed up from findings by the Australian Government Taxation board (go on, you trust the governement right!) which said that:

4.13 Business failure rates are not as high as is commonly believed. Research undertaken by the Productivity Commission in 2000 indicated that around two-thirds of businesses survive the first five years of operation, and that the majority of businesses that cease operation do not close because of ‘failure’ but for reasons unrelated to their financial position. The research showed that only around 2 per cent of businesses cease operations each year because the owners, while solvent, cannot secure a sufficient return, and only 0.5 per cent of businesses cease operation each year due to insolvency.31

http://www.taxboard.gov.au/content/scoping/scoping-04.asp

So theres a definition of failure anyway — over a five year period, 33% of small business will “fail” or at least stop operating. It’s an interesting report and there’s more gems in it if you want to read the whole thing.

Here’s my observation, those start-up business that fail do so for one of a few primary reasons (some of this is supported by the things I learnt at BootUp camp).

1. They don’t know how to make money. “I’m going to build this great thing and people will love it. I’ll figure out how they pay me later.”
2. They don’t know who their customers are. “1% of the Internet will buy this at $1, I’ll be richer than Bill Gates.”
3. They have no idea what their business model is. “I going to start a bookshop because I like reading.”

To further elaborate on point 2, I recently joined an Enterpreneurs Group on LinkedIn. One of the first questions I saw coming through from another IT startup was “How can I reach my customers?”. What was immediately obvious was that this guy had NO IDEA who his customers were. He’d started a testing services company without the first clue on who wanted to buy testing services! No wonder he was struggling, and no surprise if he fails.

Beyond this, there is a further complexity of course in that the vast majority of small business are clearly not IT related. Still, there is hope for the aspiring business creator like myself!

Alex and I are very happy that at this stage of the game (before we commence business operations) that we know the answers to 1 and 2 and for 3 we are clearly operating in an area of some domain expertise. We are building enterprise software for enterprises and we’ve both been there and worked for enterprises before.

Only time will tell — maybe we will fail, but having tried to quantify our chances of success I feel even more positive about our venture than before. The next time someone tells me 90% of start-ups fail I’ll ask them “who says so?” and point to the government figures.