Reasons for a Small Business Failure - Essay Example

Why Do Small Businesses Fail Analysing the Reasons for their High Rate of Failure in the UK Chapter 1 Introduction The journey of innovation - beit of product or service - is long-drawn and requires perseverance. Very few take the courage to think through their ideas and give it the shape of a business. For the business to succeed, however, even good ideas need good backing - of finance, of marketing and much more. Innovations and start-ups are essential for the growth of an economy and for fresh ideas to be fused in. Yet, it is a dangerous journey for the one who undertakes it. The financial and emotional stakes are high. The UK has seen a high rate of closure of start-ups. Studies show that by the third year of starting up, at least half of them close down. While there are external factors such as inadequate funding that leads to this, part of the reason is also internal - such as the work culture, the marketing being poor, the location not being right, the product being ahead or behind its times, and so on. Therefore, for an entrepreneur to succeed, it is essential that they come with not only a product/service plan but also its business plan and a back up in case the first one does not work. Backing this marketing strategy is a good branding, a strong and dedicated team, and the right location. But that's not enough, the time to launch has to be right too. The task for an entrepreneur before setting out on the journey to setting up business is cut out for him. 1.2 The Hesitation In the first place, there is a lot of concern that not many innovative ideas find the light of the day in the UK. According to a study commissioned by NESTA, an early stage investor in innovative and creative businesses, 80% of innovative ideas do not see the light of the day as knowledge of how to go about it, lack of funds and lack of time. However, the biggest concern was the fear of failure - what if the venture failed This fear is not without basis. According to a Deloitte1 study, (BusinessHighStree.com): The number of British firms forced in to administration rose by 26 per cent during 2006. According to a Cambridge University's Centre for Business Research study (Fielding2, 2006) based on three surveys of more than 1,000 SMEs conducted in 1991, 1997 and 2004, SME survival rates fell from 59% to 54% over the same period. Between 1991 and 1997, 28% of the companies in the survey failed; between 1997 and 2004, that proportion rose to 32%. Fielding reports: Among its more worrying findings, the research reveals a significant decline since 1997 in the proportion of SMEs carrying out research and development activities - from 52% to 38% - even though R&D investment is considered vital to this sector of the UK economy. Such statistics would clearly deter anyone from venturing into setting up a new business. Supporting this is the CBR finding that, since 1997, research and development activities of the small and medium enterprises fell from 52% to 38% despite it being considered important by the UK government. According to Finfacts Ireland3 website: The decline in the UK's early stage entrepreneurship rate, from 6.2 per cent to 5.8 per cent, was partly attributed to the growth in jobs in the financial services sector, where the lure of high wages was attracting many would-be entrepreneurs. According to a press release on the Small Business Service4 website: In 2005, there were 177,900 registrations and 152,900 de-registrations, resulting in an increase of 25,000 (1.4 per cent) in the stock of VAT-registered enterprises during 2005. Chapter 2 Why Start-Up The industry is already filled with businesses - large, medium and small - offering products and services right from a safety pin to aeroplane. Then why another company Is it merely the entrepreneurial spirit or is there truly something new on offer Unless the entrepreneur can truly answer this question, there may really be no point in starting a new business. For, several times, it may be the same idea in an old bottle. For instance, an idea may be approached from a different angle but may be an extension of an existing service. Even in such a case, making the differentiator key to the marketing strategy is important. When there are several photo sites, one site that stands out for its easy usability is Flickr (Gabbay5,2006), which won a small but loyal followers. It was subsequently acquired by Yahoo! There are already several HR consulting firms. However, a woman entrepreneur, Glenda Stone6, saw an opportunity when she realised that there was untapped market of specialised services for women professionals. With that was born a niche firm, Aurora, which provides a female-focused corporate HR software and marketing services to over 100 blue-chip clients. 2.1 What next Having an idea for a new company is not enough. Studying the market, understanding the customer requirements, defining the profile of the employees and packaging the products/services such that they will appeal to the market is essential. As the founder of the HR firm says, having once firmed up the business idea, she studied the market deeply. She realised the need to upgrade her staff skills as well as bring in funds to support her ideas. Parallely, understanding competition - in this case, it would still be general HR firms since women employees would get placed through them too - and understanding their success strategies would be important. Understanding business is also important for getting the right kind of funding - though getting the fund alone does not ensure success. Chapter 3 The Hard Facts 3.1 The Funding Factor Two betting websites started at the same time (Gabbay7, 2007). Flutter got the required funding while London-based Betfair missed the bus due to the timing. Therefore, the latter evolved a business strategy different from the other considering its financial constraints. While Flutter evolved a e-bay like strategy of creating a community that could bet against each other, Betfair targeted more at giving the bettors the best deal. Despite the lack of funding, Betfair's strategy paid off while Flutter could not find its footing since liquidity became more important than community. Flutter and Betfair have now merged. For Flutter, the strategy it adopted may have seemed attractive to the fund managers but that did not ensure success since what worked in Betfair's favour was that it focused on a small and niche segment, which contributed in value rather than volumes. Fund managers also need a strong marketing strategy to consider the start-up seriously since that in itself is key to success in the market. The dotcom bust is a clear example of this. Funding was abundantly available as this industry was expected to revolutionise the world. While it did prove to be revolutionary in terms of shrinking the world, the absence of clear strategies soon proved that most had no revenue-generation plans and funding was the only means to keep them going. In addition to no revenue-generation, the companies also ended up spending heavily on technology and salaries, draining resources. The expenditure was clearly way above incomes. The few that have survived this bust, such as Amazon.com, have done so because of concrete strategies that have the customer in mind and fill a gap in their buying cycle. LowerMyBills.com, a consumer focused lead generation company, was acquired by Experian in May 2005 (Gabbay8, 2006). LowerMyBills.com started as a medium of selling 18 consumer products and lower their bills. The idea was to enable cunsumers to lower their monthly bills, especially on long-distance telephony. However, with this service becoming commoditised, the need to use this website for lowering bills came down. However, when the company could not raise the second round of finance, instead of closing down or they went for a rethink of strategy. The existing business model had opened the way for yet another business strategy - that of enabling consumers to finding mortgage finance and other loan application to lenders. By offering a large variety of consumer products, and by constantly tracking product performance for each of them, the company ensured that it was on top of consumer behaviour and requirements. Thus it could identify the alternative source of revenue when this one seemed to be not sufficient to keep them going. Here, the team also played a key role. Right from the CEO, each employee ensured that they maintained a daily dashboard report and kept a tight control on ad campaigns - which were the main leads for consumers to reach their site from. Lack of funding is one of the most important factors for start-ups closing down operations. The break-even period can take up to three years and sometimes longer, by when the fund managers can lose patience about waiting to see results. According to a British Venture Capital Association study (Brown9, 2006), venture capitalist funding in UK technology startups fell from 86m in 2004 to 84m in 2005. This can only go up when entrepreneurs prove themselves to be a low-risk proposition. 3.2 Marketing Strategy According to an article in Business Week (Klein10), one of the reasons for failure of start-ups is that it is probably by individuals who love their product/service too dearly and fail to see the pitfalls. This leads to their inability to fine-tune it to suit the market. Therefore, the market strategy they develop will also be based on false premise, affecting the performance of the company ultimately. A company started in 2002 to develop affordable global positioning system in the US shut down recently. According to the company's director (Cook11), the product - though not necessarily innovative - was not accepted by the market. Sometimes, the market conditions may not be right. The slump in the telecom industry, for instance, saw several players quitting due to inability to general revenues and insufficient funding (Duffy12)> In this context, branding takes a new dimension - and is probably the most neglected area. Many a times a good product or service can go unnoticed as the tendency to brand them to placate a friend or a spouse is quite common. Branding, on the other hand, needs to be stylised and communicate the differentiator so that the product/service is imprinted in the buyer's mind. Visibility is also important, as is the location of the office premises. An upmarket concept in downtown will be difficult to sell. Therefore, this should be looked into carefully. Similarly, while realty may be lower in some areas, the infrastructure may be poor. But first, identify your market. The dotcoms had grand ideas and probably even target audiences, but were the audiences net-ready As in the case of the dotcoms, there is a time to launch. If the product is too ahead of times or behind, the success is difficult to come by. 3.3 Staffing Up A good idea without the right team will be unable to sustain for long. The IT sector, with its high attrition as well as the constantly needing skill-set is a good example of how start-ups can face a challenge in retaining talent due to being unable to match the high salaries paid by larger enterprises. The dotcoms too faced this problem - in having programs that promised high but were short on delivering. As the Stone pointed out, first finding the right team and convincing them of the concept is important to ensure that the entire organisation thinks the same way and is able to communicate the confidence to its customers. 3.4 Training & Awareness Many innovators are dreamers with probably not much awareness about the market reality. Some could feel all the questions asked by funding agencies difficult and unimportant to running business (Charman13) Therefore, the funding agencies too have a responsibility towards sensitising the prospective entrepreneurs towards the significance of strategising, developing a revenue-generation plan and training its staff. Chapter 4 Conclusion There is extensive evidence that entrepreneurship is essential for the growth of an economy. At the same time, the entrepreneurs too need to come up with innovative ideas with definitive marketing strategies that ensure that funding agencies are interested in backing the venture. Too often, as the dotcom bubble proved, a great idea could still let you down unless backed by revenue-generating strategies. The strategy needs a good team that will ensure the realisation of the goals and a commitment that makes a difference. This will also have an impact on customer perception of the company and greater loyalty. For the customer to be truly interested, the product must make a difference to his or her lifestyle and be different from what is already available in the market. The UK entrepreneurs, as can be seen from several articles and blogs online, seem to be hesitant to go all the way when it comes to setting up their ventures. Lucrative alternatives could be one deterrent to setting up a business. And, once it is set up, lack of planning and strategy hampers growth. An idea remains one without finding many takers and funding agencies back out, as they fear losing money. Grand plans and high expenditure alone, as in dotcoms, will not ensure good marketing. In fact, this has proved otherwise since it has been a drain on resources. What is important is careful strategising, a control on expenses and a focused marketing in the initial years. This needs the backing of good branding so that it makes a difference to the customers. Sharing of your idea with peers and friends and finding the loopholes before the idea takes the form of an organisation is important. Market research to see what the competition is like and how they are handling the market is important. Also important is to study the gap and offer a service that caters to the need. Clearly, start-ups in UK are failing because they lack in one or all the above-mentioned areas. As a result, venture capitalists are hesitant to invest in what they consider high-risk ventures. And this becomes a vicious cycle where companies close because of lack of funding. References Brown, James. 2006, Startups suffer funding slump, Best Practice < http://www.bestpracticemagazine.co.uk/computing/news/2168728/startups-suffer-funding-slump> Charman, Suw. 2005, Response to Blog on Where are all the UK start-ups Cook, Bob. 2006, Wozniak Start-Up Wheels of Zeus Shuts Down Duffy, Jim.2003, Allegro Networks Closing Down, Network World, Fielding, Rachel. 2006, Climate gets tougher for start-ups, Best Practice, Gabbay, Nisan. 2006, Flickr Case Study: Still about tech for exit. < http://www.startup-review.com/blog/flickr-case-study-still-about-tech-for-exit.php> Gabbay, Nisan. 2006, LowerMyBills.com Case Study: Adapting to new markets < http://www.startup-review.com/blog/lowermybillscom-case-study-adapting-to-new-markets.php> Gabbay, Nisan. 2007, Betfair Case Study: Target a niche and expand < http://www.startup-review.com/blog/betfair-case-study-target-a-niche-and-expand.php> Klein, Karen E. 2002, The Bottom Line on Startup Failures .2007, 2006 saw increase in business start-up failures, Global Entrepreneurship Monitor: Start-ups fell in Ireland, Europe and US in 2006 but China powers on Lessons Learned: Glenda Stone, Founder and CEO, Aurora 2006, Statistical press release: Business start-ups and closures, VAT registrations and de-registrations in 2005 Read More