This article was first published in the South African edition of Entrepreneur magazine as an opinion piece.
Eighty percent of all start up small businesses will fail within two years, right? Or is it 94% within a year? Franchised businesses are safer, are they not? But by how much seems to be a closely held secret.
Into this catalogue of failure and uncertainty a large infrastructure of very smart people and institutions devote huge amounts of money, thought, assistance and support to educate and support entrepreneurs to open up new businesses and grow existing ones. Banks vie for attention, great publications have large circulations, business coaching is one of the fast growing sectors. Against these supposed market results I have to ask: ‘why’?
One reason is that we individually experience much higher success rates than those quoted so universally. I have yet to find anyone associated with the SME sector whose clients’ exhibit the level of failure quoted. It seems that the failure rate only happens to the other guys.
Another reason is confusion about what constitutes a business failure. We identify the surviving businesses, not the failed ones. If only 6% of businesses survive and employ staff then what happened to the other 94%. Did they fail? Did the entrepreneurs die, emigrate, remain sole traders or close their companies when they accepted a job offer? Did they merge with another company or relocate offshore? We don’t know.
I believe start-up businesses have a high failure rate. It also seems likely that franchised businesses will be safer bets. But what are the real statistics and why are they so hard to find? The ABSA Business Round table concluded that the failure rate was 63%. A study in the Eastern Cape of 1000 survival businesses provided with funding and little else by the Province found 6% still operating ten years later. A 2007 study of franchised filling stations showed a chilling 47% failure rate in the first year, but a 2010 study of Soweto businesses showed an encouraging 40% survival rate after four years. The Franchise Association does not have failure statistics. The Mail and Guardian pointed out that the Global Entrepreneurship Monitor (GEM) and Finscope reported a difference of two million business owners. CIPRO records of closed down businesses within the first three years have often been quoted, but those include shelf companies and single purpose vehicles.
All of this uncertainty has massive consequences for the prospects of SME driven employment and growth. Entrepreneurs become hesitant to commit to start- ups. Banks will not lend without collateral. Private and public sector organisations become reluctant to enter contracts with start-ups and existing SMEs. Credit is difficult to come by. SMEs prefer to sell to large organisations rather than to each other.
While this is happening, the excellent work done by GEM, headed by Mike Herrington in South Africa, is largely being ignored except as the source of failure statistics. GEM 2005 showed that South African nascent entrepreneurial business have a lower prospect of becoming established businesses than those in other comparable economies, but GEM also highlighted South African poor attitudes to entrepreneurship and the unacceptable education outcomes as factors which should receive urgent attention.
With all the effort going into entrepreneurship, the billions available through the Enterprise Development of the BBBEE codes and a slice of the R9Bn job creation fund earmarked for SMEs I hope that somewhere there are policy makers and strategists with hard information about all aspects of entrepreneurship including failure rates and reasons, asking these questions:
Why are the statistics regarding entrepreneurship so poor? GEM states: ‘It is almost impossible to obtain accurate statistics on small and medium businesses, or on the various sectors of the economy. The lack of accurate data hampers research as well as the ability of government agencies and NGOs to offer the correct targeted assistance’.
Is it not about time that the DTI, the business associations, Stats SA or all of the above should be tasked with producing accessible, realistic and credible figures? And while they were at it, they could also investigate successes as well as failure, so we could build on the experiences of successful entrepreneurs.
All of us should, in our own spaces calculate the same statistics, and then focus our efforts on emulating the successes, rather than gleefully taking about failure.
Comments invited – what do you think about the start up business failure rate?
©copyright Ed Hatton. All rights reserved. You may republish this article or extracts from it provided you acknowledge me as the author and acknowledge my copyright.