You undoubtedly entered the small to mid-sized business (SMB) world knowing that starting a small business was synonymous with risk. Well, you were right, and perhaps the included statistics on small business failure rates won’t come as a total shock to you. Let’s briefly define “small business” before jumping into those figures. The federal Small Business Administration (SBA), the source for our numbers in this blog, classifies a small business as an independent company with fewer than 500 employees.
According to the SBA, only about half of all small businesses survive five years or longer. The SBA adds that throughout the last 10 years, this percentage has ranged from a low of 45.4% for businesses started in 2006 to a high of 51.0% for those launched in 2011. The study states only about 33% stay in business beyond the 10-year mark. Rather grim numbers for sure.
The SMB terrain is treacherous, you already knew that, but the question of why so many small businesses fail is fascinating to examine—and gets more so every year.
Interestingly, a rough economy does not head the list of reasons so many SMBs go under. According to the SBA, small businesses launched during robust economies in 1995 and 2005, as well as those started right before and right after the downturn in 2000, ran along very similar survival paths.
Thus, we are left to ponder: What are so many small business owners doing wrong? The answer is, plenty, and a few of the top reasons are real head-scratchers. We looked at a recent study from intelligence research platform CB Insights to take a closer look at exactly what is going wrong.
At the top of its list, shockingly, was “no market need.” Huh? You’d think the most fundamental reason for launching a new business was to identify a market need—the old “fill a hole” strategy. However, no market need for the product/service was the number-one reason for small business failure on the CB Insights list. No matter how great the product, the price you set or the budget you have to work with, if people don’t want/need something, they won’t buy it.
"Nothing will present a bigger wall to climb for your launch than a weak business model."
Reasons such as “running out of capital” and “selecting the wrong employees” were next on CB’s list, but another, at number seven, was “launching a product without a business model.” Nothing will present a bigger wall to climb for your launch than a weak business model.
It’s no surprise those who stick to focusing on solving problems their customers care about have the greatest success rate. A business plan structured around what matters most to the customer and how your product or service addresses what is bothering them, and how you can resolve that, is a winning plan.
The notion of bringing a product to market without a well-thought-out business model is bizarre to us, but apparently not uncommon, as 17% of respondents cited this as a reason they failed.
The other eye-opener on the CB Insights list was reason number nine: “ignoring the customers.” This is all about spending too much time producing a product or service from the creator’s perspective and not getting enough user feedback. It’s called “tunnel visiom,” and just because you think something is pretty cool doesn’t mean the vast majority of people will.
Consumer behavior and opinions seem to turn on a dime nowadays, as the old ‘here today, gone tomorrow’ attitude has become more and more prevalent. Customer feedback remains a vital element to your business long after you’ve launched. Social media voices, both negative and positive, need to be cultivated, constantly. It is the communication channel that consumers are turning to in increasing numbers for opinions, reviews and specifics on products and services before making buying decisions. To ignore all this chatter is akin to signing your SMB death certificate.
We understand there are lots of landmines that can undermine your small business, but stepping on the ones in plain sight is self-defeating.
Original Funding is always happy to discuss all your lending options, whether your business is expanding or simply needs to replenish inventory. Our platform works to find a customized program to help you accomplish all your strategic goals. Find out exactly how we can help today.