Why Businesses Fail

The famous line from the film Field of Dreams, “If you build it, they will come,” is commonly used by business professionals and entrepreneurs to imply that if you have a business idea and put forth the effort to create it, people will come to it. In a perfect world, it probably happens. But we don’t live in a perfect world. We live in a capitalistic society where we can’t force people to transact with our business simply because we have built it. In our society, people get to determine where to invest, what products to buy, and the prices for buying them. If they don’t think that the product or service is worth the price tag attached to it, they simply won’t purchase it.

The idea of “build it, they will come” really dissipates as a theory when looking at the statistics behind startup successes. Although different studies show different statistics, the consensus is that many startups fail. In a study conducted by the Bureau of Labor Statistics. They found that of all the businesses started in 2016: 79.6 percent made it one year (2017); 68.8 percent made it two years (2018); 61.2 percent made it to three years (2019); 54.3 percent made it four years (2020).

Even the most optimistic studies, show that only four years into starting a business, roughly half survive. D&B did a study on business failures and found that 90% of all failures can be traced to poor management resulting from lack of knowledge that created limits on management’s ability to critically think about their business. For instance, startups don’t fail because there is no market need for their product, but because they are entering a market in which the supply and demand metrics are not in their favor. Just because you build a business doesn’t mean people will become your customer because there are alternatives that solve their pain point. Therefore, if you want to maximize your odds of ending up on the other side of startup failure rates, then you will need the business knowledge to create a product in a niche with very little supply and high demand.

My personal observations as a successful entrepreneur and business mentor is that business owners go under & lose their businesses — not because they weren’t talented or smart enough — they try to re-invent the wheel rather than rely on proven, tested methods that work that are part of a good business knowledge base.

Again, the biggest factor that leads to business failure is the inability to critically think about the business.  This is due to the lack of domain specific business knowledge. CRITICAL THINKING ISN’T AN ABSTRACT, TRANSFERABLE SKILL…Itʼs “DOMAIN SPECIFIC”. Itʼs intimately tied to knowledge of the subject…first you must possess information to think about it & the way you think about information in one field (business) is almost entirely different from how you think about it in another field (chemistry). So to increase your odds of success, be sure you have the business knowledge in areas like: planning; accounting; marketing; human resources.

For more thoughts on how not to fail, sign up for a free mentoring session.

Copyright ©John Trenary 2021

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