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Ability to fail quickly an important skill

Sometimes it makes better sense to cut out early than struggle on.

Sometimes it makes better sense to cut out early than struggle on.

Is there a bigger business myth than: “Most small businesses fail”? The failure rate for small business in Australia and other advanced economies is not as bad as the perception suggests, although I suspect it depends on how failure is defined.

It is a critical topic, given there are 2.13 million actively trading business in Australia, according to latest Australian Bureau of Statistics (ABS) data. The perception that most small businesses fail over time can discourage people from launching a venture, exaggerate small business risks, and make owners too risk averse and fearful.

Australian entrepreneurs had the second-highest fear of failure, just behind the Republic Of Korea, in innovation-driven economies, the 2011 Global Entrepreneurship Monitor (GEM) shows. Thankfully, Australia had the second-highest Total Early-Stage Entrepreneurial Activity, second only to the United States.

I’m sure many small business owners and entrepreneurs hesitate to launch a venture because of the perception that the vast majority fail.

The Australian Centre for Entrepreneurship Research, at the Queensland University of Technology, recently published an interesting note on new business failure rates. In “The New Venture Mortality Myth”, Dr Jonathan Levie, from Glasgow’s University of Strathclyde, examined overseas data on business failure rates.

He concluded: “Studies show that in the world’s most advanced economies, new businesses do not suffer a high failure rate.” Levie considered data from the OECD Entrepreneurship Indicators Program that showed the five-year persistence rate for new businesses averaged just over 50 per cent.

“We found the myth of high failure rates was perpetuated by poor-quality referencing," he wrote.

"These practices are used by promoters of books on how to achieve success and avoid failure in business, journalists in search of sensationalist stories, successful entrepreneurs who believe they are ‘special’, business advisers and trainers who wish to justify their work, and suppliers of business equipment and services ... and, yes, academics who wish to justify their business research.”

Ouch! Levie does not examine the issue from an Australian perspective and appears to consider all new businesses in his findings on failure. The ABS data on business entries and exits suggests slightly higher failure rates in new Australian businesses.

The ABS found that of 316,850 new business entries in 2007-08, 71.5 per cent were still operating in June 2009, 56.8 per cent were still operating in June 2010 and 48.6 per cent were still operating in June 2011.

Its latest Counts of Australian Businesses report said: “The survival rates for new businesses are significantly lower than for those businesses that were already established.”

About 60 per cent of established businesses running in 2007 were still operating four years later.

ABS data suggests just over half of new businesses in Australia fail within four years. To be fair, the research’s sample period (2007 to 2011) was mostly during the global financial crisis.

Some might conclude the small business failure rate in Australia is reasonably good given the incredible challenges some industries experienced during the GFC.

To put this in perceptive, many people lose or change their jobs within four years, so the data showing just over half of new businesses fail after four years seems in line with other aspects of the economy.

And is a higher failure rate necessarily a bad thing, if it is partly because business owners had the sense to close their venture early, move on and reallocate capital to a better idea?

The real issue is: How many small businesses perform well below the owner’s expectations for years and in reality have failed, even though they don’t register as such in official statistics? 

Such a business might still submit a Business Activity Statement, and is thus not considered “dormant” by the ABS. Yet in its owner’s eyes, the venture has failed even though it muddles along, making his or her life a nightmare.

In my view, if there was a way to add in these businesses, the failure rate would be significantly higher.  

Then there is the issue of separating fast-growth entrepreneurial ventures from small businesses, given most data does not distinguish between them. High-growth start-up ventures should have a much higher failure rate, given the bigger risks involved.

As The Venture has written many times, some ethical failure is useful, as entrepreneurs learn how to recover from setbacks and develop new skills.

In fact, being able to fail quickly is an important skill for entrepreneurs who see their ideas as a “portfolio of experiments,” where they launch hypotheses rather than fully formed and funded business ideas.

So don’t believe everything you read about massive failure rates in Australian small business, and don’t for a minute believe small business or entrepreneurship is easy.

The best advice is to have a clear exit point when you know your venture has been performing below expectations for too long, and to take action early.

Don’t be one of the tens of thousands of business owners who struggle with underperforming ventures for years, out of pride. They may not show up in official business failure statisics. But in many ways, their failure hurts a lot more, and for a lot longer.

4 comments so far

  • Good advice, but it can be incredibly hard to follow when you have invested so much time, money, and emotion in a venture. I have watched a respected businessman go through exactly that when he struck out on his own, and I have experienced it myself.

    Date and time
    August 06, 2012, 1:51PM
    • Over 50 per cent of small businesses not operating four years after they were established doesn't seem a good statistic to me.

      Scott Parker
      Date and time
      August 06, 2012, 4:43PM
      • I can suggest a few more reasons why small businesses give it away after a 4 to 5 year period - Greedy banks/landlords and the 'sick of it' phenomenon, which seems to kick in around the 4 - 5 year period, usually because traders can't cope with face to face dealing with customers. I believe many traders don't go broke ( just because a business closes the door doesn't necessarily mean the owner/s has gone belly up) frequently they realise they are in fact working for their landlord or bank, not themselves, and are treading water financially so they just fold their tents and have a mental re-charge before setting up again a few years down the track - which could be bricks and mortar or online.

        Date and time
        August 07, 2012, 5:53PM
        • I suspect that the 4-5 year mark is also the stage where the golden dream of working for yourself gives way to reality. The idealistic end to workplace drama, the thrill of being your own boss, loft talk of work-life balance has given way to sleepless nights worrying about the do-or-die burden of absolute responsibility for your livelihood. Working for yourself is the boss you can't get away from at the end of the day and it is more intrinsically tied to your sense of accomplishment so the knocks potentially hit closer to home.

          Elissa Bramley
          Date and time
          September 06, 2012, 10:02AM

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