The start-up sector suffers a ‘failure’ misconception

I’ve just read another headline alluding to the fact most start-ups fail. It’s an eye catching line - often accompanied by a sales pitch for services guaranteeing start-ups can avoid the terrible stigma of failure. The problem is the headline’s not true.

Most start-ups (companies aged four years and under) don’t actually fail. New data from the Australian Bureau of Statistics Entry and Exits survey confirms - again - of those that started in 2009, nearly half (47.5) are still going in 2012-13.

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Source: ABS

That’s not bad. If we drill down further the news gets better for aspiring entrepreneurs. ANZ's Nicole Franklin crunched new numbers from the latest ABS data for BlueNotes. She found for firms that survive their first year, in this case from 2009-10 to 2010-11, 65 per cent were still in operation in 2012-13. 

We all know the first year of any new venture is the hardest as many people try to work out if they are committed or if the customer base they assume is out there actually want to buy from them at a price that will make them a profit. 

For existing businesses the numbers are even better: of the 2.1 million businesses operating in June 2009, 86.9 per cent were still operating in June 2010, 77.4 per cent were still operating in June 2011, 69.9 per cent were still operating in June 2012 and 62.9 per cent were still operating in June 2013. 

Does exit equal failure?

Of those that do exit, it actually can’t be assumed they are failures either. There are lots of reasons people stop trading. They might have sold or merged their business which in anyone’s books is hardly failing. 

They may decide another opportunity is more attractive. They may take time away from work to have a child, falling into the ABS’ definition of ‘inactive’. Is that failure? Or they may have got an attractive offer to join another business and decided to put the idea on hold. 

So how many actually fail? Probably not that many – certainly not enough to give credence to the well stated maxim that most start-ups fail. 

Hiring builds companies not risk

There is another myth worth challenging. Often when people seek to expand from simply employing themselves they are met with naysayers who advise them it is too risky. Often too they don’t want the extra risk of taking on employees. 

But the more risk a company takes in hiring staff and expanding, the greater chance they will be around for the long term. For each of the last four years chances of survival increase as the business moves form hiring no-one, to micro (one to 4), to 5-9 and 20-199 staff. For example the exit rates in 2012-13 decrease from 17.4 per cent for non-employing companies down to 3.9 per cent for companies that employ between 20-199 staff. 

What determines success?

What these statistics tell us is that if you want to start a business, there is true demand for your product and service, you have priced it right, you can execute and supply a good quality service, then odds are you will succeed. Get past the first year and you have a very good chance of surviving. 

We need to get that message out. The internet, a once in a century innovation, has created enormous disruption which heralds opportunities for people who want to have a go. It has dismantled barriers to entry and substantially lowered the cost and increased efficiencies of marketing and technology, key reasons enterprises fail. 

Yet the start-up marketplace in Australia is nascent and as BlueNotes reveals, there has been a 30 per cent decrease in start-ups over the past three years. 

It is time Australia viewed its start-ups as a key part of economic and employment growth. We need better tax options to encourage investors to back new businesses and to urgently change the draconian tax rules that slug new businesses with huge tax bills if they offer staff equity in their business.  

And to anyone thinking of starting a small business, tell them not just to go for it but to aim to grow and employ. Chances – and the stats back this - are they will look back and thank you.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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