Just the fact that a person starts a new business says quite a bit about them. The positive characteristics include ambition, intelligence, tenaciousness, vision and guts. Jerry Mills, founder of B2B CFO™ calls these rare individuals “Finders” in The Danger Zone – Lost in the Growth Transition. The rate varies by industry, but on average, 75% of start ups will fail by the 10th year of operations. With these high-powered individuals at the helm, why do so many start ups fail? More importantly, what can you do to avoid the high probability of becoming startup “road kill”?
Some speculate that under-capitalization is the major reason for high startup failure rates. Surely that is one significant constituent. The high number of variables in start ups make it very difficult to project cash flows, especially since you have no history to use as a guide. Since the tendency is always to underestimate, then insufficient capitalization is surely a culprit in start up failures. But perhaps not as much as you think. Most new businesses run “lean and mean” as the graphic below suggests. Correspondingly, the failure rate for start ups is only 25% in the first year, which suggests that the influence of undercapitalization on start up failure rates is not as pronounced as some assume. Many entreprpreneurs have very little expectation for immediately success in their new ventures and have sufficient cash reserves to avoid taking salary or draws if necessary. Accordingly, under-capitalization can often be overcome by the tenaciousness of start up entrepreneurs by frugality and by simply choosing not to pay themselves in the first year or two of operations.
In a prior blog, I discussed the challenges associated with collecting accounts receivable. Failure to manage accounts receivable is a huge problem for start ups as well as some more established companies. With little room for error though, an early stage company may not recover from poor collections. This malady, however, is completely avoidable with proper attention from the “Minders” in the organization. The Minders are those individuals in the middle of the organizational pyramid above. They are very good at handling administration, accounting, human resources, etc. That leads to my theory about the major cause of start up failure.
Start ups fail from the lack of proper delegation. An entrepreneur must decide where they will focus attention as the business moves forward. In the beginning, the entrepreneur has great clarity on where to spend time, which invariably is finding customers. But then “stuff” gets in the way. Stuff like banking relationships, cash flow planning, human resources, 401k’s, and the photocopier breaking down. These responsibilities should be handled by the Minders, who are very good at taking care of compliance type responsibilities. Finders often fail to delegate to the Minders, lose focus from these administrative distractions, and then stop bringing in new business. The chance of a start up failing is much higher when an entrepreneur demotes themself to Minder status, and no one is focused on new business.
The solution is for the entrepreneur to promote themselves back to Finder status and delegate the rest to Minders. Fact is, however, that most entrepreneurs aren’t very good at delegating. Therein lays the problem. Without delegating, the Finder starts doing the Minding activities, and the business goes south. Lack of delegation assures that a small Petaluma start up will not grow, and therefore will die a premature death. But with proper delegation, the start up has a fighting chance to avoid becoming part of the 75% start up failure rate. Consider outsourcing the Minding activities in your organization. Consider a part-time CFO. Consider B2B CFO™.