It seems that start-up businesses fail more easily than established businesses. Many good business ideas have been vacated by entrepreneurs because of the fear of failure. Furthermore are venture capitalist and banks hesitant to fund start-up businesses because of their perceived high failure rate. But what are the reasons that start-up businesses fail?
Reasons why start-up businesses fail
Barry Singer has used the development of a human embryo as a metaphor to describe the battle that start-up businesses face to stay open. He mentioned the following potential hazards that a new business face:
- Entry barriers – it is generally not possible for a new firm or product to successfully enter an already crowded, stable market where competitors are strong.
- Density of developmental hurdles – any new entity must establish, as it is maturing, a well-ordered office, a functional sales channel, etc. Failing to do so is potentially fatal, and that is unfortunately what happens with one in three businesses.
- Amplification of maturational error – any complex system that grows rapidly and is unable to predict the future perfectly is going to accumulate structural errors that become very difficult to remedy.
- Sequence and control in development – start-up businesses may lack structured control mechanisms that warn owners if their businesses go awry.
- Smallness and the asymmetry of luck – because new ventures typically start off with scarce resources, a bad bounce can sink the company, and the probability of at least one such bad bounce is high.
- Costs of organizing – a new company must learn through experience much of what it means to be mature. Costs associated with learning arrive just when the firm is most vulnerable and distracted by other challenges.
A start-up business that has done its ‘homework’ before opening has a much better change to stay open. Therefore a well written business- and marketing plan is essential to start your business the right way. Good luck with your new venture!
Remember, you need a well researched and written Business Plan to get your business off to a good start!
Singer, B. 1995. Contours of development, Journal of Business Venturing, 10(4):303-329.