FORMER Prime Minister Gordon Brown looked determined when he said to me, “We’ve got to get more small businesses started”. My response astonished him: “As you know Gordon, nearly nine new businesses fail for every one that succeeds. I’m worried that we will just add to the nine, not to the one”. “Oh yes, of course” he said, as he wondered if dabbling with the business world was worth the hassle.
Why do so many fail? What grand scheme of unhappy occurrences connives to defeat all the optimism and dreams behind a business launch? To me, problems arise from one of three causes: the original idea is no good, the execution of the idea fails, or “unknown unknowns” emerge with disastrous effects.
Despite all the brilliant ideas out there, I am sorry to say, there are also some plain silly ones, and I get emailed my fair share. One was the electronic “nappy wand”. The wand is waved over the baby and changes colour if the nappy needs changing. A brilliant invention looking for a cause. How it works, I’ve got no idea. What I do know though, is that having had children of my own, if a nappy needs changing you can either hear the baby from the next room or smell it. The wand is portable – great for parents, who really need something else to carry around on a day out with junior.
While there is no shortage of these wild ideas, it is poor execution of more reasonable ideas that causes most businesses to fail. High profile businesses have made high profile mistakes, such as Kodak (underestimated digital photography), Woolworths (out-competed on price) and maybe even Nokia (missed the convergence of phones and computing). But at least they savoured success for a while. The usual mistake for anonymous small start-ups is to spend too much getting started. The lure of the fancy website, plush office, trade fairs and expensive advertising lead many to their demise. Others find that for whatever reason, the anticipated sales, outlined so precisely in their business plan, just don’t happen.
Finally, as on the battlefield, there are the “unknown unknowns”. Business can be like playing at a casino where you don’t even know what game you’re playing. One company of mine didn’t recover after a $1m piece of machinery we had sold to a US customer was accidentally dropped from the back of the delivery truck and smashed to pieces. We were insured but the loss of time opened a decisive window of opportunity to a competitor. Another, a software company I had, died because software developers prefer the fun of writing their own code to buying our cheap off-the-shelf libraries. I didn’t know that I didn’t know that.
So how does a start-up be part of the one and not the nine? Use the first year as a research project: test the idea and business plan as much as possible, for as little money as possible. Oh, and hope the unknown unknowns are on your side.
Since the mid-1990s Richard Farleigh has operated as a business angel, backing more early-stage companies than anyone else in the United Kingdom.