WHY AN 80% BUSINESS START-UP FAILURE RATE IS A MYTH

BILL JAMIESON

How often have we been told that starting a business is a mug’s game, that there is a murderous failure rate and that only a very few start-up firms succeed as a viable business?

Failure amongst technology start-ups in particular is not only seen as a fact of business life but is lauded, considered trendy, enshrined as a kind of rite of passage for all techpreneurs.

This ‘celebration’ of failure stems in part from the common myth that 80 per cent of businesses will fail within their first year.

The statistic first appeared in 2013 in US business magazine Forbes where it was stated that eight out of 10 businesses will “crash and burn” within 18 months and the remaining 20 per cent are unlikely to survive past year five.

But Max Chmyshuk, founder and managing partner of Fleximise, strongly disagrees. This figure, he points out, only applies to the microcosm of Silicon Valley. It does not translate to the wider start-up landscape.

Moreover, business survival rates in the rest of the USA, UK, Australia and Canada prove that the myth does not hold in any of these countries.

He cites the latest Eurostat report which shows that the one-year survival rate for European enterprises is actually around the 83%.

A new report from Fleximize, The Real Rates of Business Survival, reveals that an average of 8 out of 10 businesses can expect to survive their first year, and half will still be in business at the end of year five.

Despite a tough economic climate, says Max, entrepreneurship is thriving in Europe and technology hubs are booming.

“Indeed, tech start-ups are key drivers of economic recovery, through their ability to stimulate innovation, creativity and alleviate unemployment.
“This is further emphasised by the fact investment hit an all-time high in 2015 with angels and VCs breaking records and raising £2.51 billion to fund UK technology companies.
“Therefore, whilst statistics vary by geographical location and the industry within which the business is located, the general prospects of success for Europe’s businesses are incredibly high – including for those in technology.”

He finds that the sectors with the lowest survival rates in the UK are actually finance (85% survive year one but only 39% survive to year five), and accommodation and food sectors (91% and 33% respectively).

On the other hand, in both the UK and US, healthcare and education have the most stable five-year trajectories.

When it comes to the tech sector, Fleximize’s report does highlight that only around 45% of start-ups in the UK and 43% in the US survive to their fifth year. But it’s essential to note that this is still significantly higher than the alleged failure rate proposed by Forbes.

“It is also imperative”, he says, “that we recognise that tech start-ups are not so dissimilar from those in other sectors; they still face challenges throughout their lifespan. Regardless of product, raising funding, managing cash flow, negotiating government regulations, increasing profit and growing revenue are all essential requirements for a successful business.

“Across all sectors financing is the biggest killer of young companies – with 63 per cent struggling with taxation, VAT, and other forms of monetary strain.

This issue is particularly prominent in Europe given that banks now refuse loans to a large percentage of SME applicants and start-ups.

“Ultimately, SMEs are more resilient today than ever, with more options for flexible capital available and more adaptable when it comes to unforeseen obstacles. With new forms of finance available, start-ups are making the most of innovative solutions. More are surviving than ever before.

“Failures will still happen – in the first year, the first five, and many years after that. There are challenges and obstacles at every stage of the business lifecycle.

“But it is time to scrap that cautionary tale of how 8 out of 10 start-ups fail. It is time to recognise their success and contribution, not as lessons in failure, but as a bolster to the economy and to business growth.”

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