90% of all startups fail. So goes one of the most popular statistics floating around the startup ecosystem. But where did this belief originate from, and why on earth is still so popular?
A 2011 American study called the Startup Genome Report reviewed the success, hurdles and failures of 3200 businesses, and found that 90% of the sample startups failed within two years. Of the dataset, about 70% scaled prematurely, which is the number one reason for failing.
This doesn’t mean that 90% of all businesses everywhere are doomed to fail. The eight-year-old study only looked at 3200 American internet startups, which are defined as ‘temporary organisations meant to scale into larger businesses.’ This narrows the field considerably. A fairer picture today comes from the UK Office of National Statistics (ONS).
We trawled through 14 years of data on business birth and death rates in the UK to benchmark what ‘normal’ really looks like. Turns out large businesses face a larger issue when it comes to business survival than businesses with 10 to 50 employees.
Here’s the gist: when it comes to business births, there are now 42% more new businesses in the UK now than five years ago. Only 36% of all UK businesses really make it to their 10th birthday.
42% of micro businesses (employing fewer than 10 people), 45% of small businesses (employing between 11 and 50 people), and 51% of medium-sized businesses (employing between 50 and 249 people) make it to the fifth birthday. For large businesses (employing over 250 people), only a dismal 15% make to the five-year mark. Of course, the raw data reveals that on average, fewer than 100 large businesses are ‘born’ yearly, so the birth rate is understandably minimal.
All of this digging around reveals one indisputable fact: startup statistics are all arbitrary. But these figures still do make the rounds in business circles and considerably add to the culture of entrepreneurship.
“Generally speaking, I’ve not yet met a founder that isn’t aware they’re going into a risky endeavour,” says James Parton, managing director of the Bradfield Centre, Central Working. “There’s an appreciation of ‘survival of the fittest’ for tech startups, helps them hone their focus and proposition.”
In his role at Central Working’s Cambridge wing, he sees tech scale-ups take flight on a daily basis. The Bradfield Centre has 83 companies on site with an average age of 4 years and an average team size of 5 people. 7 of the 83 are university spin-outs, 16% are Cambridge University graduates.
According to Parton, a demographic breakdown reveals that 32% are female, which is twice the UK average of 16%. “It’s a huge difference but it’s not good enough,” he adds.
When it comes to survival statistics, Parton believes that the real challenge is hoping that founders who hit roadblocks pick themselves up and give it another go. “When a business fails, you hope the entrepreneur tries again. Being a serial entrepreneur is a good thing. You get to apply the lessons learned the first time around. Use that experience to work somewhere else, or found another business. It’s a high-stakes game, but there’s a real opportunity to recycle talent in the ecosystem when entrepreneurs leave and return.”
Business survival statistics and SME perceptions
70 businesses are being created in the UK per hour on average, but up to 57% of these new businesses collapse within five years. That’s yet another statistic to add to the growing dataset. But what makes this business survival statistic more salient is that a new report from The Entrepreneurs Network as part of the Business Stay-Up campaign reveals a perception problem in the UK SME ecosystem. The pressure to succeed on pure P&L terms makes survival all the more difficult.
The focus should be on quality, not quantity, and on equipping fledgling business owners with the tools to help their businesses survive and thrive.
Differences in management account for half the productivity gap between the US and UK. Management is as important as R&D and twice as important as IT for productivity. Productivity, in turn, is the biggest factor holding back pay growth in the UK. According to the report, improving the quality of British management is key to solving our productivity crisis. Closing the productivity gap between the top and bottom three quartiles would boost UK GDP by 270bn, but less than a third of SME employers provide training for managers, seeing it as an added expense especially if they’re trying to keep their head over water.
“Not all businesses deserve to succeed, but they ought to be given a fighting chance,” says Sam Dumitriu, research director at The Entrepreneurs Network and author of the report.
“We need to equip more business owners with the skills they need to survive and, hopefully, thrive.”
For Dumitriu, this would require tax breaks for SMEs and the self-employed when they fund their own training. “This is the norm across the OECD with two out of three nations providing a deduction for self-funded work-related training. It’s time the UK caught up.”
In response, Small Business Minister Kelly Tolhurst pledged that the government will develop a new SME leadership programme. “As part of our modern Industrial Strategy we are investing £31 million through the Business Productivity Review in peer-to-peer networking and to develop a new SME leadership programme,” she says. “We are also investing through the Business Basics Fund in business-led trials of new innovative approaches that encourage SMEs and start-ups to increase adoption of best management practices and technology.”
The immediate impact of these programmes on business survival understandably remains to be seen.
Hedging risks: Are SMEs optimally using data?
Entrepreneurs famously rely on gut-instinct and experience-based decision-making. With the rise of data-driven decision-making, numbers matter, as does risk modelling. How many UK SME decision-makers actually rely on data?
“Effective risk management is not only about preventing loss and protecting reputation, it also enables better decision-making. By ‘thinking risk’, SMEs increase their chances of hitting targets and meeting objectives,” Steve Giles writes in ACCA Global.
In areas like sales and marketing, data is goldmine. These areas are what secures businesses the revenues they need to stay in the black. According to Vinay Ramani, chief product officer at Pipedrive and former head of growth at Uber, tapping into sales tools could help SMEs minimise risk.
“Salespeople love data. AI loves data. So the combination is a match made in heaven.” – Vinay Ramani, Pipedrive
“As the use of AI tools increases, what does that mean for the future of sales? It certainly doesn’t spell the death of the salesperson. Instead, this emerging technology will support sales professionals in significant ways allowing them to focus on more important tasks rather than repetitive details,” he says.
One of the most exciting developments of AI for salespeople is the virtual assistant, Ramani adds. “A salesperson’s day is quickly filled up with administrative tasks like emailing, scheduling, data entry—the list goes on. Great people will always be the backbone of successful sales, but AI will become the crucial tool supporting them. Think of it as a power-up—allowing you to do your job faster and better, and qualify leads more effectively.”
Trying again isn’t easy: The dark side of entrepreneurship
The emotional toll of running a small business cannot be underestimated. According to Central Working’s Parton, there’s an increasing focus on not just practical tools and skills to run a business, but work-life balance and mental health. “The stigma around these issues are slowly being addressed. (Mental wellbeing) is super important. You have to be all in. it’s going to be stressful, long hours, a lot of responsibilities. Starting and running a business is not something to be taken lightly,” he tells Real Business.
Over the last two years, mental health has become a key boardroom issue in Britain for both big and small businesses, but the gap between the perception of how much has been achieved and the reality is still wide. The rhetoric about mental health used by senior business leaders is not always being translated into tangible actions.
At present, 58% of them think that their organisations support their staff, while only 42% of employees with no managerial responsibility say that staff with mental health issues were being supported according to the Mental Health at Work 2018 report.
Every week, more than 100 people take their own lives in the UK. 300,000 people with long term mental health problems lose their jobs each year and the cost of poor mental health to the UK economy has been estimated at between £74 – £99 billion per year, according to the 2017 Thriving at Work report.
“Research by Mind shows that 43% of employees find their situation gets better when they disclose theirmental health problem, highlighting the importance of talking to others about our problems,” says Jason Daye, operations director at PHMG, an audio branding agency based in the UK. Employees at PHMG will soon be able to report any confidential workplace or home issues anonymously via Tootoot – a unique online and app-based platform originally launched to help school students.
But what about UK’s small business founders? A new book, 100 Stories of Growth: How they did it sheds light on the hard times over 100 SME owners have faced when setting up and running their businesses.
Spearheaded by Guy Tolhurst, the book details the trials and tribulations of business owners who are often isolated and living month to month.
“I’ve been an entrepreneur myself most of my life. I’ve run three businesses, the first one 11 years ago…and it’s been quite a bumpy ride,” he says.
“I’ve struggled along that journey with things like changes in regulation, losing key talent within the business, struggles with my business partners, the breakup of my relationship with my partner, losing regular access to my two small children. In that time, it’s been quite reflective. At what cost have I been pursuing this entrepreneurial journey?” -Guy Tolhurst
Going through the motions himself, Tolhurst became more aware of the toll running a business takes on founders, physically and mentally. He started to become fascinated by how entrepreneurs in the UK are doing, and how they’re being supported.
“A lot of entrepreneurs were struggling, suffering in silence. It was a hugely cathartic experience for me,” he says of speaking to other founders who were dealing with similar issues. “I realised that I’m not the only one who’s having a tough time with all of this. We’ve uncovered quite a lot of issues facing the entrepreneurial community. Even though we’re continuing our research and storytelling, we’ve launched a separate campaign to look at the hidden cost of success.”
“In the same way our sporting stars do, I passionately believe founders need the right people, tools and support around them to perform at their best on a national or global stage; and the courage to openly discuss the pressures and challenges they face to sustain growth in this competitive environment.”
Business survival: Are UK’s minority-led startups more at risk?
For non-white business owners, business survival can be even more critical, according to a new study by the Enterprise Research Centre (ERC). A look at 600 London firms finds 48% of businesses run by ethnic minority leaders have experienced an “existential crisis” threatening their survival in the past five years.
This is 15 percentage points higher than what firms run by white entrepreneurs face. But how is this measured and what does this mean?
Researchers at ERC interviewed 600 business owners in six London boroughs – three categorised as lower income (Tower Hamlets, Lambeth, Hackney) and three middle income (Hammersmith and Fulham, Camden and Ealing) to understand their experiences. Half of the firms were led by women and around 30% by someone from an ethnic minority.
Two-thirds of London businesses were taking formal steps to think about risk. The top three threats were perceived as loss of key staff, rising costs and cashflow problems.
Firms with leaders from a minority background were significantly more likely to have experienced a crisis threatening their survival in the past five years. In lower-income boroughs, this figure rose to more than half.
The researchers will explore the reasons for these differences further in the next phase of the research. However, they suggest that financial issues including under-capitalisation and the absence of available support networks could help to explain why ethnic minority-owned businesses may be more likely to experience shocks.
The data also show major differences in the types of threats entrepreneurs are most concerned about. Female business leaders worry more than any other group about personal circumstances such as illness and staff issues, while minority leaders express more concern about cybercrime and data theft.
And both groups judge several challenges to be more potent threats to their businesses than their male and non-ethnic minority counterparts, including competition from new and existing sources, cost rises, problems with premises and changes in regulation or legislation.
There are also big differences in the motivations behind starting a business, with both women and ethnic minorities much more likely to cite contributing to their local community as a factor (63% and 65% respectively, versus 44% and 48% for male and non-minority respondents).
And when it comes to getting external advice, women and ethnic minority entrepreneurs are more likely to consult friends and mentors and less likely to consult lawyers or accountants than non-ethnic men.
UK data from the Global Entrepreneurship Monitor (GEM), published earlier this year show that people from ethnic minority and immigrant backgrounds are twice as likely as their white British counterparts to be early-stage entrepreneurs.
The study found that in 2017, the total entrepreneurial activity (TEA) rate among non-white Britons was 14.5%, compared to 7.9% for white Britons – a gap which has widened substantially since the Great Recession of 2008-9.
There are around 300,000 ethnic minority-led businesses in the UK, representing just over 5% of the 5.7m total, according to the Department of Business, Energy and Industrial Strategy (BEIS). These firms are estimated to contribute about £20bn annually to the UK economy.
“The fact that minority-led firms are more likely to report experiencing a crisis could be down to a number of factors. We know that under-represented groups face greater hurdles when accessing business advice and finance and some of that could relate to discrimination or unconscious bias,” Maria Wishart, Research Fellow in business resilience at the ERC, says.
“And while we found no significant difference in the resilience of different groups of entrepreneurs to setbacks, female and ethnic minority business leaders are more likely to perceive certain factors like staffing and fixed costs as major threats to their firms. We need to understand how well-founded these concerns are and whether policy interventions could alleviate some of them.”
Case study: Jack’s Garage
Joseph Salama’s business, Jack’s Garage, specialises in vintage VW campervans and cars. But being located in Ladbroke Grove just 150m from Grenfell Tower, meant that after the devastating fire in June 2017 the firm was quickly plunged into crisis.
“For three days the building was literally on fire. There was a thick smell of burning plastic and an invisible substance in the air like ash,” Salama recalls. “They closed down all the roads and there was only one way in or out. Deliveries just ceased. Over the course of that week I sent many of my staff out to various centres to help in the relief effort because we’d run out of parts.”
But over the following months things went from bad to worse. With the burnt-out shell of the building visible just outside the garage, Joseph’s clientele from wealthier neighbourhoods nearby simply stopped coming.
“I had a number of occasions where customers stepped outside, saw the carcass of the building, and just burst into tears,” he says.
Revenues dropped by 60% in the following six months and Salama was forced to lay off many of his staff. He also noticed a big psychological impact on his mechanics, which he says he managed by trying to “be more lenient and understanding with my team”.
By Christmas last year, the firm was in survival mode: “I couldn’t pay my premises rent.”
“I used all my savings and reserves to pay the bills and keep the business going. We completely cut our marketing spend. It was hand to mouth. I was juggling the suppliers and I absolutely hate that – I hate asking for credit, it’s not good business.” – Joseph Salama, Jack’s Garage
A £5,000 grant from the Portobello Business Centre a social enterprise that provides training and support to SMEs in West London, allowed the business to survive into 2018. “They were instrumental in keeping us afloat,” said Joseph. “Until that point, I could never have imagined such a relatively small sum could be so important, but it made the world of difference.”
Salama is from an Egyptian Coptic Christian background and feels his faith was important in keeping him going. His fiancée (now wife) also provided invaluable support when feelings of personal failure were starting to overwhelm him.
Nevertheless, by April this year he was in discussions with an insolvency practitioner, initially with a view to stepping aside and transferring ownership of the business. Instead, he consolidated his debts and has since gradually returned to profitability. Staff numbers are back up to eight.
He feels that talking to other businesses locally helped him to see the bigger picture. Many established firms in a wide radius of the tower also suffered and this helped him keep perspective. On a practical level, the loyalty of long-standing clients provided a lifeline.
Salama now has plans to diversify into the fast-growing trend for low carbon and electric vehicle conversions and his experience of getting help in his hour of need from the Portobello Business Centre has opened his eyes to the possibility of getting grants and loans to support his firms’ growth.
Ultimately, he feels the experience of the past 18 months has made his business stronger. “It’s drawn all of us together as a team,” he adds.
“My people are my business, and they’ve now experienced the ups and downs with me. It’s definitely made us stronger as a unit. It’s also given me a real perspective on what’s important and what isn’t, so I’ve stripped a lot of costs out of the business and it’s something I’m going to remain much more aware of in future.”
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