There are lots of statistics about business failure worldwide. Regardless of which statistic you agree with, they all tell the same story: Chances of failure are really high. I was raised with a statistic that 80% of businesses fail in the first year, and another 10% in the second year, leaving less than ten percent to survive beyond three years. Some might argue different numbers, but these are the ones I see around me.
More important than the statistic is what they can teach us about starting a business. Here are the top ten lessons I learned from these gloomy statistics:
- Year 1 is Survival Year: First year everything is exciting. Probably you started the business because you saw a few good leads, or because you have seen successes that inspired you to let go of employment and go to free enterprise. You will be in love with your product. So will be your mother, relatives and friends. But will the customers love it enough to make it a survivable business, let alone profitable one? Usually people start with a seed investment. Usually they are generous in the early stages. then they find out how much they have spent, and they fail to perfect the last few touches that make them marketable. This is why sometimes a restaurant opens up with a substandard sign, or terrible chairs, or missing final decorations. Year 1, must be about getting a few successful engagements under your belt, staying afloat financially, and refining the product and the target market.
- Year 2 is Reality Year: This is the year where the excitement settles. Entrepreneurs start getting beyond the hype and the cool image of being an “entrepreneur” and start looking into how to create a profitable business model. They increase their marketing and sales efforts beyond their immediate friends and acquaintances. This is a tough year because spreading the word of mouth might elude many because of how simple it looks, but how tough it really is. Some companies fold here as they see the enthusiasm suddenly wither away. This year, what I call “pity contracts” also get cutoff. These are contracts from people who are giving the new startup work out of support and sympathy. Some find out that this whole startup thing is more trouble than it is worth. Especially if they are in a country not very attracting to new or small enterprise. Regulations, taxes, liability, insurance, and many other overhead costs might be more than originally expected and they business might start losing margins to overhead.
- Year 3 is Clarity Year: If a business makes it this far, they already have some experience to talk about. This is not an easy feat, getting this far. How a company goes from here depends on how well the company and its owners found their niche market and value proposition. If the company is doing well, this is the year where some partners might try to move out non-value-adding partners. If the company is not doing well, shifts in roles and responsibilities might happen and also some partners might leave because they are not aligned with the other partners. This is the year where company functions especially marketing and sales need to be streamlined.