Common sources of success or failure of startup firms Essay

Common sources of success or failure of startup firms - Essay Example While it is important for the economy to have influx of new, innovative, and entrepreneurial companies the actual success rate of new companies is dismally poor. In fact, 90% of all new companies launched in the UK will fail within the first two years (ibid). There are proven strategies and models available which can help increase success and growth rates, and one such strategy consists of thinking the project through and preparation of a business plan. 'Perhaps the most important step in launching any new venture or expanding an existing one is the construction of a business plan.'(Barrow et al, 2001:6). Although a business plan has several purposes and target audiences, most are produced with a limited view of enabling the raising of finance. Raising finance is critical for the success of the venture and 'the business plan is the minimum document required by a financing source' (Kuratko and Hodgetts, 2001: 289). More than three-quarters of business angels require a business plan before they will consider investing (Mason and Harrison, 1996). However, at the core of a successful enterprise is a planning and control effort that must recognise the needs of the venture and reduce it to a plan for systems that will help monitor and control execution as well as to milestone progress, or lack of it. Uncertainty and change are the norm and a successful business plan must have the inbuilt flexibility to manage change and meet exigencies that arise during the course of operations. This report looks at the most common reasons for failure of start-up businesses and this is used to inform suggested strategy for the preparation of a good business plan. A plan that will address not only the need of submission to banks and potential investors but also to the other audience, such as suppliers, distributors, major customers etc. Above all it will guide decision making in new ventures and lay a clear path to be followed for success of the new venture. This study limits itself to small and medium sized enterprises. Success and Failure While success is easy to understand, i.e. it implies that the projections of performance have not only been met but may have been exceeded as well. Definition of failure is more difficult and has been variously defined as discontinuance of ownership' of the business (Williams, 1993); discontinuance of the business' itself (Dekimpe and Morrison, 1991); and bankruptcy' (Hall and Young, 1991). In the following passages we explore what fundamental causes help a newly started business flourish and conversely what are the main reasons for failure. Different authorities have analysed the prime reasons for success and failure of start-up ventures. Quantitative studies by Lussier and Corman (1995); Everett and Watson (1998); Lau and Boon (1996); Lussier (1996); and Van Gelderen and Frese (1998) (quoted in Riquelme & Watson, 2002) have been used to formulate the reasons for the failure of new business ventures. The primary reasons are placed in a tabulated format as an appendix to this report. The highlights of the findings of the studies cited are discussed briefly below. The most important criterion appears to be the managerial team. For example, Macmillan et al (1985) conclude that the quality of the entrepreneur ultimately determines the investment decision of venture capitalists, notably a thorough