What Really Causes Business Failures? 0

What causes business failure? Tough question. And it’s very hard to answer, because there’s so much misinformation and questionable research.

Just think about it: to really answer that question you’d have to start with a random list of business failures. Where would you get that? Then you’d have to investigate each one and figure out the real cause. The owners wouldn’t always know for sure, and even when they did know, they might not tell the researchers. Poor product, poor service, lack of financial planning, no real market, unforeseen competition, changes in fashion, lack of resolve … maybe not doing the work, trusting vendors too much … how often do you think there’s just a single cause?

Still, we throw these statements around as if we knew. Yesterday I got a sales email with the subject line (direct quote):

How to prevent the #1 Cause of Business Failure

And the lead-in (also a direct quote):

According to the SBA, the #1 reason why entrepreneurs fail to launch and grow successful businesses is simple… “LACK OF FUNDING”

I ask you: How useless and obvious is that supposed fact? Isn’t it like saying the cause of death is lack of breathing? And what good is it, except possibly to sell something to small business owners.

I don’t blame the SBA for the sales email here. The SBA does tons of good research and gets misquoted, or misinterpreted, all the time. And I don’t even blame the author of the email, because it’s a useful lead-in to what they’re selling. I assume (I didn’t click to watch). It’s just that the so-called cause of failure is so trivially obvious that it bugs me.

One of my personal favorites on this subject is a list from several years ago that puts started for the wrong reasons as the first on a list of seven causes. That captures the real essence of the problem: the businesses fail because people discover it wasn’t what they thought it would be. Author Patricia Schneider wrote:

“Would the sole reason you would be starting your own business be that you would want to make a lot of money? Do you think that if you had your own business that you’d have more time with your family? Or maybe that you wouldn’t have to answer to anyone else? If so, you’d better think again.”

I believe she has a really good point. Is it a business failure when you start the wrong journey for the wrong reason, with the wrong expectations, and then eventually stop?

I think lists can be useful when they generate thought. But when you get these lists, like supposed causes of business failure, turn them back onto your own specific case and see what applies to you and your business. Then discount the rest.

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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