It
will be a pleasant surprise to most to learn that according to the Small
Business Administration; approximately 80% of all small businesses survive to
see their second year. However, thereafter, the picture increasingly turns
bleak; a https://www.forbes.com report, reveals that only around half
the companies go beyond the five-year mark, and most dismayingly, only one in
three businesses outlast more than 10 years. As discouraging it seems there are
a number of factors that lead to small business failure and by identifying some
of the most critical, entrepreneurs can improve the chances of success. Some
tips from experienced small business captains:
Leaders Continuing to Manage
That
there is a distinction between leaders and managers in the context of small
business is not readily understood or appreciated by many. Leaders are
responsible for generating the big idea, inspire others, craft a vision,
setting up the business, securing the funding, and bringing the company to the
launch stage. Any leader who thinks that he can continue for long to be a
visionary while attending to the operational issues of the business is
overestimating his capabilities. Leaders should generally stick to envisioning
the long-term future of the business while managers should be left with the
task of running the company profitably. Mixing up the two roles is a surefire
recipe for entrepreneurial disaster.
Waiting Too Long for the Second Round of Funding
Most
owners of startups remain so totally obsessed with securing the seed capitals
that they completely ignore the demands of the company further down the line.
After struggling for months if not years to get the initial round of capital,
they are so relieved that they immediately start burning the cash without
having a clear strategy in place to take the company forward with further
funding. Since venture capital funds coming into the company at a later stage
are typically in for larger amounts, they are also more risk-averse. Getting
them onboard can take quite long and in the meantime, the business may have run
out of funds. As much as you are excited about the success of your seed
funding, you should immediately set into motion a series of activities for raising
the second round of capital before the business runs dry. Putting in too large
a gap between two rounds of funding can lead to dependence on debt; it is quite
common to see startups in a debt trap and having to undertake debt
consolidation programs.
Starting the PR Campaign Before the Business Is Ready to Roll
Many
entrepreneurs fall prey to the temptation of going public with just a concept
far ahead of the probable launch date of the startup. As a result, when
inquiries start pouring in, the business is not in a position to deliver and disappoints
its target audience. It is obvious that the same target audience will remember
the failure of the business to deliver when it does become operational and the
response then could very well be quite lukewarm. If you are not in a situation
where you can have a large footprint, it is a good idea not to use the mass
media because you will end up talking to customers who cannot be serviced. It
is better to remain local to satisfy the customers and expand only when you are
able to.
Running Out of Stocks
Most
startups tend to maintain a low level of inventory to keep costs down, however,
if your production base is in a developing nation several thousand miles away,
a lean inventory can spell trouble if you run out of stocks because it can take
quite some time to be able to start shipping again. If the customer response
has been good, you simply cannot be turning the supply chain on and off just to
minimize your inventory. Even if you are producing locally, you should try to
make the distribution only as large as you can effectively handle. Customers
who have ordered but not made the deliveries tend to get irritated for obvious
reasons and will influence the rest of the market to pull away from you. Unless
you have the financial resources as well as the warehousing in place, you need
to keep your customer bookings under control.
Not Hiring at the Right Time
Most
owners of startups tend to keep on expanding the number of things that they
will do for the business simply because they think that the time is not right
to hire more employees or that it is unaffordable. However, what commonly
happened that the owner drives himself into the ground trying to achieve more
than what is physically possible and loses sight of the bigger picture. With
the funding in place and the business ready to take off, it can be extremely
frustrating to see big opportunities go by simply because you lack sufficient
manpower. Sustainable growth can only be achieved and managed if you have the
right team in place; consider employing contractors for some tasks if you think
your employee count needs to be conservative to better face uncertain times in
the future. The additional expense will be more than compensated with
incremental business volumes.
Not Willing to Let Go for the Betterment of the Business
The
tendency of most founder CEOs to cling on to their seats even after it is amply
clear that the business has grown to a size that is beyond their capabilities
to manage is among the most common problems leading to stunted growth and
ultimate business failure. When a CEO is unwilling to relinquish his position,
it can mean missed opportunities that can prove to be very costly. Furthermore,
the entire team can end up being dispirited and the performance will end up
flagging. It is not unusual to see founder CEOs leading the business on a very
fast growth trajectory, however, if you are not one of them, you should step
aside in favor of someone who’s more qualified. Vacating the CEO’s seat is not
easy but it can easily be the next big step for the company.
Conclusion
There
can be many reasons for small business failure, however, it is clear that the
leaders need to be really perceptive about how the business is performing, how
it will meet the challenges of the future, and especially about factors that
can hold up its growth and make it lose out on valuable opportunities.