What No One Ever Tells You About Business Failures 1

The mythology of failure rates is greatly exaggerated, I think. Not that you’re not going to do it anyhow, just like I did, but, for the record, you know they say seven out of ten startups fail within three years, and that comes from research that was done.

But more and more there is an alternate group of sort of naysayers, and I think I’m one of them, who says, “Yeah, but those statistics are wrong because they just work on legal records, government statistics on businesses starting and businesses failing, and they forget the fact that some significant percentage of businesses appear to die in the official records when in fact they’ve grown and been rebuilt under a new name. Or they’ve been purchased by a larger business or two businesses combine, and these are like successful exits in growth which shows up as a business dying.”

Palo Alto Software started out as an Infoplan in 1983, a DBA. That supposedly died if you look at the statistics. But actually there was an Infoplan, Inc., a Delaware corporation that sprung up when the sole proprietorship died, and that Delaware corporation became Palo Alto Software, Inc., a California corporation. So there you see another business dying, but it hadn’t really died. Palo Alto Software, Inc., a California corporation, became an Oregon corporation in 1992, and the California corporation died in 1994. So there you see another business dying, and see it wasn’t.

I have a business that I registered called Willamette Press that I’ve kept for a few years. It never did anything. It was just kind of a thought I had, and it cost me $35 to register it. But nothing ever happened, but then it died. Well, that would show up in official statistics as something dying.

One of my daughters had an aquarium maintenance business while she was in high school that she registered because she wanted to do checks and things. So, you know, I’m an entrepreneur. I helped her. So she had this business with two or three clients for a couple years. She graduated from high school, went on to college. The business died, but that’s not a business failure. Really, that’s a temporary business.

Then there are the businesses that are done for tax purposes, that spring up and die, all of it related to taxes, and it wasn’t really a business.

So it’s not as bad as people would sometimes imply, I guess is the point of this, and more importantly, we can influence the likelihood of failure by doing our business planning right. We can break our uncertainty down into components, and we can then track it as we go on and follow up and see the business better so that we’re reducing the chance of failure by looking at sales and costs and expenses and adjusting things quickly.

The business planning we’re going to do starts with a business plan, but then you’re going to take it into every month running your business better so you don’t have the same likelihood of failing because you’re steering. We’re not going to drive the car blind. We’re going to steer the car. We’re going to make corrections, and that’s going to reduce our failure rate.

So I know I tend to get missionary on that, but it bugs me that there’s so much misinformation there.

 

About the Author Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

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