Five key reasons why start-ups fail

In a lively speech delivered last week, former opposition leader Malcolm Turnbull covered everything from hard hats and fluoro vests to the embracing of “creative destruction” in his critique of Australia’s start-up scene.

His spiel also included the following lament: “We all know that most start-ups don’t make it. Roughly a third close by their second year. Only half make it to age five.”

The silver-haired japester then added: “I have invested in start-ups where I’ve lost the entire investment in less than 180 days, which I regard as being extremely discourteous.”

“I think you’ve got to have some manners and I think if you’re going to lose your investor’s capital you really shouldn’t lose all of it in less than 12 months. There’s got to be some dignity.”

So do Malcolm’s figures add up? We put the Turnbull statement through the StartupSmart fact checker and found that it’s broadly true.

According to the Australian Bureau of Statistics, of the 316,850 businesses that were launched during 2007-08, 71.5% were still operating in June 2009, with just 48.6% still going by June last year.

The ABS itself states: “As such, the survival rates for new businesses are significantly lower than for those businesses that were already established. This indicates that business survival is related to the age of the business, i.e. the longer a business survives, the greater its chances of continued survival.”

So what are the main reasons for start-up failure that Turnbull alludes to? We’ve picked out five key things that derail new businesses. Make sure you avoid each of them.

1. Giving up

So you’ve had a great brainwave for a business. Full of enthusiasm, you launch your venture, convinced the world will be bowled over by your genius.

And then you have to deal with the nuts and bolts. The bills. The process of getting your product or service up and running. Disappointed customers. Unexpected costs. It becomes like wading through treacle.

Unless you have a clear vision of why you started up and a cast-iron certainty that your concept can be transformed into a viable business, there’s a chance you might just give up, as many entrepreneurs do.

“Having a clear reason why you’re going into business is important both to you and your customers,” says Marc Peksett, director of business advisory firm MPR Group.

“Your reason why should start with a problem or a need that is currently unmet. It typically stems from having a strong understanding of the market and knowing how you can use your skills to solve a problem for your customers.”

“This becomes your value proposition, which distinguishes you from your competitors and provides your customers with a compelling reason to buy your products.”

“What keeps your customers coming back is the passion and belief you have in what you deliver and the way that permeates your business. This includes your relationships with staff, suppliers and customers.”

“Your reason why should spark this passion, give you courage and help sustain you through the tough times. Your reason why must feed your belief in what you’re doing on a day-to-day basis and help you carry on every time a potential customer says ”no” or a deal doesn’t turn out the way you planned.”

“Remembering your reason why will help you to quickly recover from set-backs, and allow you to carry on.”

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