I recently caught a Why Startups Inevitably Fail piece on Guardian eCommerce. It cited a survey done by the U.S. Commerce Department that stated that of every 10 small businesses, seven will survive their first year, three will still be going after three years and only two will remain after five years.

That’s just a story. It’s a useful story, even if it’s not true. Those numbers don’t apply to your startup any more than average heights and weights apply to your body or average IQ to your mind. If they are accurately reported, the study was done about 10 years ago and didn’t differentiate well between real and fake.Fortune Cookie

Example: one of my daughters registered “Ecoaquatics” years ago as a DBA for a high-school aquarium business. It lived in the world of statistics as a business until we let it drop off the map a couple of years later. So it’s one of the failures. I registered “Willamette Press” years ago and I’m still paying $35 a year to preserve its legal existence. So it’s a survivor. Neither of these should be counted.

Another example: two months ago the SBA released statistics showing that there are more than 20 million non-employer businesses in the U.S. How many of those are intended as businesses, and how many are reflections on tax law?

Furthermore, startups are not one thing but rather, a collection of different things. Some are doomed for almost certain failure, whether their founders know it or not. How would you have liked to have invested in a chain of CD stores just before Napster made them obsolete? And how certain was the success of Truemors.com with Guy Kawasaki behind it? I’ve posted here on different types of startups, some much more needy than others.

What does matter, however, and much more important than whatever the real number is, is business failures as story. Urban myth perhaps, but regardless, the piece I picked up in the Guardian eCommerce told an important story for startups. The main point and question is why do startups fail.

The answer is amazingly simple and can be reduced to three main causes: 1) lack of working capital; 2) a poorly conceived business model; and 3) a poorly constructed business plan.

Lack of working capital is usually the “last straw” that sinks the already troubled ship. One might argue that it is not really a cause but the effect of another cause — poor planning.

The business plan is your business’ guidebook. If it is properly written, it will contain all of the key elements that will guide you in the formation and running of your business. A great business plan is the key to raising capital. Simply described, a business plan should start with a business model, then go on to describe how you are going to execute that model. It must have a good amount of financial information, including current financial statements and a budget that is projected over at least a three-year period.

Additionally, it should have a detailed description of how you will market your product or service and include therein a description of your competition and how you intend to not only survive, but also actually thrive, given the competition that exists in your field.

That’s one opinion well expressed, although I think the title — why businesses inevitably fail — is off base, because businesses don’t inevitably fail. Yours doesn’t have to fail. It isn’t inevitable.

Marc Andreessen’s series on startups includes one piece on what he calls product/market fit, another important take on preventing failure. I included that and a couple of other studies on business failures in my post Product/Market Fit is Critical.

These numbers are all stories. Like fables, they are stories with an edge, stories with a point. Plan your startup well, and you can change the odds in your favor … whatever the real odds are.

-Tim

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.