Why Do Small Businesses and Startups Fail in Australia? - 5 Reasons
In the Article (Quick Access)
The answer to the question ‘Why do small businesses and startups fail in Australia?’ can be as complex as financial troubles or as simple and basic as not using software to automate intensive procedures.
Either way, there is no straightforward answer to why so many small businesses and startups close up shop so quickly.
Australia currently ranks 8th in terms of starting businesses out of the 38 countries that make up OECD.
Furthermore, nearly all of the employment growth seen over the last decade has been attributed to startups (source: Pursuit).
The following statistics emphasize just how prominent and thriving Australia’s startup sector is:
- Australia had the sixth-highest startup rate in the world in 2020 at 5.8% (source : Statista).
- In 2021, there were more than 36,000 new business registrations in the country.
- “Australian startup firms less than two years old were responsible for driving the 1.6m net new jobs created between 2003–2014, while on a net basis, large firms made a little contribution” (source: AirTree Venture).
So, why is there such a hue and cry about startups and their seemingly shaky existence?
Here’s what Professor Colin McLeod from the University of Melbourne has surmised:
“...despite this flurry of innovation activity, very few of these start-ups create either permanent jobs or long-term economic and social benefits. It has been estimated that almost 97 percent of start-ups will either exit or fail to grow and, of the firms that do make it beyond their first two years, 77 percent of all economic benefits will be created by the 3 percent of start-ups that become high growth firms.”
These figures are all the more shocking once you take into account the loans and financial help startups have access to.
Since 70% of all Australian startups bring in innovation, banks and the government are always ready to help them along by providing secured or unsecured loans.
The entrepreneurial zeal found in Australia didn’t even let up during the Covid-19 pandemic, with new business registrations actually going up in 2021 (source: ABC).
Still, this hasn’t stemmed the number of businesses closing up shop in the country. More than 277,000 businesses folded in 2020-2021, more than two-thirds of the 360,000 plus entrants (source: ABS).
Numerous Australian businesses and startups have made headlines over the years for bowing out in as much of the flurry they had when they started.
However, this is far more than just an Australian problem.
Startups all around the world tend to fail more often than they succeed.
The latest statistics have pegged the startup failure rate at a whopping 90%! (source: Embroker)
Many of these end up failing in the first year. Even if they do make it past the dreaded first year, most fail by the third year.
A recurring theme on this blog concerning startups has been to focus on their failures.
Obviously, there have been many startups that have found rousing success as well, so why not look at them?
The answer to that query lies in the sheer number of failed ventures, in Australia and all around the world.
Because an overwhelming majority fail, it is far easier to note the similarities between their mistakes than it is to ascertain what the successful ones got right.
More than that, analyzing failures offers valuable insight and guidance for other startups who want to avoid the usual pitfalls that could derail their business.
So, just why do so many startups fail? A common theme among most startup closures is money problems, but is there more to it?
Let’s take a detailed look at that:
Why Do Australian Startups and Small Businesses Fail?
A deep look into the Australian small business and startup sector, along with some experiments, reveals a specific set of mistakes made by the failed businesses.
These mistakes may be a result of inexperience or oversight, but failing to correct them or rectifying them too late is what ultimately leads to a startup’s demise.
Without further ado, here are some of the reasons why Australian startups and small businesses end up failing:
The Copycat Approach
A common theme found amongst many failed startups is their lack of originality.
While 70% of Australian startups do bring innovation to the market, several still end up copying business ideas – from Australia or other countries.
Copying an idea may seem like a novel approach. You simply have to run a business without having to worry about creativity.
However, the truth is far different as 99% of all copycat startups end up failing!
Successful ideas do not just bring something more to the market; they also hog the market without leaving room for competitors.
There are dozens of startups looking to be the next Airbnb or Fiverr, but they disappear after a few years – or even some months – because they cannot compete against a business that has found success and a customer base.
Furthermore, startups that employ the copycat approach are usually just looking to be bought by the company they have copied.
A relevant example here is Uber, the ridesharing giant, buying up its copycat Careem from the Middle East market (source: Reuters).
However, making your presence felt against the original company is a tall order, especially in a market as saturated as Australia’s.
It is far more pertinent to focus on innovation and inspiration in a developed and growing economy than to just copy an idea and wait to be purchased.
According to the legendary Warren Buffet, the two rules of running a business are:
“Rule number one: Never lose money. Rule number two: Don’t forget rule number one.”
Not adhering to these two golden rules is perhaps the most common reason why so many startups end up losing steam or just disappearing.
Startups and Small Businesses often have a significant sum they can make do with for the first year to a year and a half. However, beyond that, their financial future depends on how they perform.
Even if they have found some success, startups are still likely to struggle financially if they:
- Mix personal finances with business money, and
- Have a poorly thought out financial plan
A businesses business plan essentially sets the tone for its immediate future.
Not taking appropriate care to figure out the finances beforehand can thus prove disastrous.
However, startups can also lose control of their finances if they end up spending without care.
Some entrepreneurs are liable to let the seed money get to their heads and spend like kings because of that.
Doing so is reckless and financial suicide.
A startup is constantly fighting for its survival while looking to succeed.
This means that every single cent matters.
A single major loss could very well affect your ability to pay staff and procure the raw materials or items you need for your business.
14% of all Australian startups fail due to a lack of proper financial management (source: Elegant Media).
However, that isn’t the only concern.
Startups are also quite likely to simply burn up their cash reserves if they are not able to generate the necessary amount of sales.
In essence, a startup’s life involves walking a tightrope between keeping hold of money and using just enough of it to grow. Problems arise whenever the balance is disrupted.
Inability to Focus
Australia, unlike many of its Asian competitors, does not have major issues when it comes to ease of doing business.
In fact, the market encourages innovation as we have discussed earlier.
While it is not difficult for Australians to open businesses, operating them is another question entirely. As Professor McLeod surmises:
“Maybe part of the answer to creating high growth businesses lies in what just about any Australian visitor to Silicon Valley hears from the locals about Australian entrepreneurs – we lack focus.”
Australian entrepreneurs have not been able to match the dedication and zeal displayed by their counterparts in the US and Europe.
This is a primary reason for their lack of growth and stagnant status even after years of operating.
Fiscal problems combine with this lack of focus when it comes to scaling.
A startup, just like any business, is meant to grow and scale it can be a major issue if you don’t know what you should be focusing on.
Scaling is not just an Australian problem.
Startups all around the world struggle with growth, with many experts attributing it to the lack of business acumen that so many entrepreneurs exhibit.
However, it is still an Australian problem. The ease of doing business demands greater focus and a sustained goal for growth.
You have spent countless hours developing an idea, gone to great lengths to secure funding, and have finally launched your startup after immense struggle.
Obviously, you would now want to let the people know what you are offering. Sadly, that is exactly where many Australian startups struggle.
99% of Australians have an internet connection, with 91% having a home internet connection (source: ACMA).
However, approx. 57% of Australian small businesses did not even have a website. Although that number has grown since then due to market necessities created by the Covid-19 pandemic, it still shows where Australian startups have been lacking.
Startups and Small Businesses are unable to market themselves and cannot drive initial sales because of it.
Poor marketing is a combination of a lack of understanding and a diminutive marketing budget. Many startups forget to include marketing expenses in their business plans since they are too focused on developing their product/service.
On the other hand, some tech-savvy entrepreneurs forget moderation and end up wasting fortunes on ineffective marketing strategies.
A business needs to utilize digital marketing tools with the aim of reaching out to prospective clients while maintaining financial integrity.
Starting Out All Wrong
Often, the reason for a startup and small business’s failure can end up being fairly rudimentary or even existential.
It might be difficult to believe, but some startups just start out wrong.
Most entrepreneurs look to start their venture without much business sense.
However, what is more, concerning is that their motivation for starting a business often ends up being quite basic, such as one of the following:
- They like the sound of being an entrepreneur
- They want to make some easy money
- They want to hop onto a trend
- They want to escape their jobs and try their hand at more “creative” things
Having such flimsy motivation is a surefire recipe for failure.
Successful entrepreneurs understand the crests and troughs of running a business, and they plan and prepare themselves beforehand to deal with what they expect to face.
Much like any other occupation or business, it is important for entrepreneurs to back their creativity up with some talent for operating businesses.
Why Do Businesses Fail in Australia?
Businesses may fail due to several reasons that do not correlate with the ones that force startups to cease operations.
Businesses usually fail because of their inability to generate capital, failure to adapt to changing economic situations, and failure to compete in the market.
What is the Rate of Failure for Australian Startups?
It is estimated that 97% of startups either fail or are not able to scale after the first few years.
Most startups end up exiting the market after the first three years, mostly due to a lack of funds.
Some startups end up being purchased by larger companies who the startups were competing against.
What Do I Do If My Small Business Failed?
It hurts to not find the success you were looking for. But, life goes on, and you need to find a regular 9 to 5 job if you have to exit your startup and shut it down.
Having a regular job can help provide you security and funds to make another, more successful, foray into the entrepreneurial world later on.
After all, there’s nothing more useful to a businessman than experience – other than money of course.
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