Small and mid-sized businesses are the backbone to the global economy, and they are born out of startups. Startups face many unique challenges, and we are currently in a position to help them cultivate success from day one. To help startups be successful we have to understand what inspires someone to create a new business and what obstacles need to be overcome.
Starting a business can be risky; there are many factors involved and nothing is guaranteed to work out in your favor. But those that have an entrepreneurial spirit also have passion, and what leads them to acting on their passion can come from seeing a solution, being dissatisfied with their existing employment circumstances, or seizing an emerging opportunity.
Oftentimes a new business is created to fill a gap in the market. The entrepreneur may see a need that isn’t being met and know they can create an effective solution to solve it. The entrepreneur might be dissatisfied with corporate life or a bad work environment or may be wanting to “call the shots.” But a majority of entrepreneurs are inspired by a life changing event, like avoiding retirement or experiencing unemployment. According to the Organization for Economic Co-operation and Development (OECD)1, “interest in business creation is highest for those who have been unemployed for short periods of time.”
Startup success is very important to the economy and to the livelihood of the business owners. Unfortunately, the success rate of startups is not at 100%. This article is not going to focus on the number of startups that fail, that creates a sense of fear. Instead it’s better to focus on what the successful companies are doing and how we can bring the success rate closer to 100%.
The US Bureau of Labor Statistics study on Business Employment Dynamics2 shows that, in the past decade, an average of 79.11% of new US businesses made it to their second year. And 50.61% of businesses made it to their fifth year! According to the Australian Bureau of Statistics3, from 2009-2015, an average of 76.14% of startups made it to their second year, and 51.7% made it to their third year!
Global research done by the OECD4 shows that there are certain consistencies across the world when it comes to startups. This research group represents countries and partners that make up 80% of the world’s trade and investment, and they have found that globally the survival rate is just above 60% after three years in business, and about 50% after five years. But their research also shows that survival is only the first challenge. They found that of the surviving startups, most do not show growth.
The landscape of the startup world is changing rapidly. Both the business world and the technology available have been changing faster than most of us can keep ahead of. But there are some things that have stayed the same. For example, there is still plenty of opportunity for new businesses to take off, and entrepreneurs still have courage, insight, discipline, and energy.
The impact these startups have on the whole of the global economy is still immense. Startups are incredibly intertwined with the technology and business industries, but they have a larger impact on the global economy, too. When the economy is thriving, startups and small businesses will be booming. And the inverse is true, too. That is why it’s so important to leverage the changes in technology and business to help startups not only survive as a business but have long-term success and growth.
If you are not leveraging the changes to create an advantage, they can become obstacles. Advances in technology make competitors easier to come by. The internet has opened up a whole new way of accessing information for other businesses to see if they can create a better solution, sometimes more quickly or inexpensively, therefore creating competitors. The internet also makes it easier for consumers to find other options, therefore creating competition.
With so much change and improvement in the business world, we would hope to see an improved change in startups’ success rates, too. However, the OECD’s research4 shows that the probability of a startup closing down is highest in the company’s second year.
We need to find better ways to help startups succeed and grow.
To understand how we can help startups, we must also understand exactly what the needs of a startup are. As you know, business owners are not usually very adept in fiscal management, and this is where ProfitSee has helped accountants and bookkeepers with their small and mid-sized business clients. This remains true for startups and entrepreneurs. New companies need someone to help them with risk management, budgeting, capital formation, cash flow projections, strategic planning, and growth strategies, all while remaining transparent to investors and shareholders.
And inside of these needs you find the underlying challenges. Startups tend to have a lack of money and are searching for funding. But funding can be a tricky area to navigate; it often seems that startups sacrifice too much of their company to get funding they may not even need! There are many funding options available, which can be very appealing to startups, but many business founders end up retaining less than 20% of their business once they get investors involved. They need to better understand their true break even and have a guided conversation into deciding who they are willing to get into business with.
Anytime an investor comes in there are key questions that should be asked to determine what the relationship is:
• What is the startup contributing to the investor?
• What is the investor contributing to the business?
• What guarantees there’ll be for the investment capital?
• And, most importantly, what is the exit strategy?
If the investor’s idea of the exit strategy is to be acquired or go public, it’s necessary to determine if that is a good plan for the business owner and for the employees. All parties must be lock-step in this to make sure things go smoothly.
So now that we see just a sample of how robust their needs and challenges are, we turn to an important question: who can help startups? Since most entrepreneurs are passionate about their business and not necessarily about finances, they need someone who can help them navigate through the fiscal management side of their business.
Investment groups and portfolio companies can act as an advisor in this way, but only if their long-term strategies line up with that of the startup. Accountants and bookkeepers have been moving into this space for small and mid-sized businesses, so they are also in a position to help with better risk management, smarter budgeting, robust strategy building, cash flow forecasting, presenting to the stakeholders, and understanding the capital needs. Startups, now more than ever, need to move from focusing solely on survival, and start planning for growth! Are you prepared to help more companies thrive by advising startups?
1) OECD/European Union (2019), The Missing Entrepreneurs 2019: Policies for Inclusive Entrepreneurship, OECD Publishing, Paris, http://bit.ly/oecdtme
2) “Table 7. Survival of Private Sector Establishments by Opening Year.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, 2019, http://bit.ly/survivaltable
3) “Counts of Australian Businesses, Including Entries and Exits; Multiple Articles 2009-2015.” Australian Bureau of Statistics, Australian Government, 2015, http://bit.ly/absgovcounts
4) Calvino, F., C. Criscuolo and C. Menon (2015), “Cross-country evidence on start-up dynamics”, OECD Science, Technology and Industry Working Papers, No. 2015/06, OECD Publishing, Paris, http://bit.ly/oecdcountryevidence