Entrepreneur's Handbook
FAILURE FACTORS IN ENTREPRENEURSHIP
Every venture is established with great hopes, with the labor and capital of many people. Therefore, it is not desirable for an enterprise to fail or go bankrupt. However, while hundreds of new businesses are opened every day, many of them have to close. The chart below shows the number of businesses established on an annual basis and closed due to various reasons.²
Considering the eight-year figures shown in the chart, a total of 899,733 enterprises were established in Turkey, while 632,616 enterprises were closed. In other words, according to the eight-year average, 70% of the total of enterprises opened every year is closed.
Considering the opening and closing rates of businesses by business types, it becomes clear that the situation is against small businesses. Accordingly, considering the eight-year average values,
while the closing rate is 56% in companies (Inc., Lt, Collective, etc.) and cooperative type enterprises, the closing rate is 85% in real person enterprises preferred by small enterprises.3 Therefore, failure in small businesses is higher than in large enterprises. Since bankruptcies occur at these levels in different types of businesses, it will be beneficial for entrepreneurs to examine and understand the reasons for this failure at the establishment stage and not to repeat the same mistakes. As a matter of fact, Oktay Alpugan, one of the important researchers on small businesses, states that the causes of failure of businesses have not changed for years, entrepreneurs do not learn from these mistakes and past examples, and they do not know the reasons for failure (Alpugan, 1998). Therefore, entrepreneurs need to both learn from past mistakes and be aware of what potential obstacles and threats may be on the way to the goal.
Before examining the factors of failure in entrepreneurship, it should be clarified what failure is. Because failure is a concept that can be defined in many ways. According to the approach here, failure means that the expenses of the business are more than the income or the difference between income and expenditure is below the standards. Very different classifications can be made especially regarding the reasons for failure of new businesses. The most important reasons for failure are briefly explained below.
6.1. Insufficient Research Before Establishment
One of the most important rules in entrepreneurship is the determination of potential risks and needs by creating a business model and business plans after sufficient research before making a decision to establish an establishment. In this way, the entrepreneur candidate will perform customer verification before making an investment. For this reason, entrepreneurship experts often recommend going out when making business plans, in other words analyzing potential customers and developing relationships with key people. Apart from these, addressing issues such as what kind of business model the business to be established will have, how to act with a plan, where to find the necessary capital before the establishment will reduce the potential risks especially during the establishment phase.
6.2. Outsize Growth
The growth rate of ventures during their establishment and growth periods constitutes an important strategic decision point. Especially during the establishment and growth periods where there is a lot of cash congestion, the business should calculate well the amount of investment to be made and the growth is realized within a plan. As a result of outsize growth, not only small businesses, but also large businesses may face bankruptcy. For this reason, planning in accordance with the lean entrepreneurship cycle and not making new investments (entering a new distribution channel, product innovation, capacity investment, etc.) will be the right course of action, especially in the initial stages of the venture.
6.3. Shortage of Cash
Lack of financial resources in businesses is one of the most common causes of failure. Indeed, when the business closures are examined superficially, it can be seen that the most important reason is the lack of financial resources, equity. However, it should be kept in mind that this reason is a result. Consequently, the failure of the business as an economic asset represents a financial problem. In other words, it is not possible for a business without a problem in its financial resources to go bankrupt. Therefore, it can be argued that every business closure or bankruptcy is due to financial reasons. However, the reasons leading to these financial problems will be different. Therefore, although the lack of financial resources is a failure, it will be more meaningful to focus on the reasons that reveal this.
Accessing the necessary financial resources is also an important issue for a business that prioritizes rapid growth. The time between the investments made by the entrepreneur before entering the market and the period when he starts to earn income from these investments is called the "valley of death", which has recently become popular in entrepreneurship literature.
In the figure below, the time from the research and development stage to the growth stage of the new product is given on the profit curve. As can be seen here, depending on the innovation nature of the product, the financing of the research and development expenses related to the product before the establishment and the financing of the investments made to produce the product is a critical issue. Because, during both the R&D stages and the activities carried out to put the product on the market, businesses have to use their capital continuously since there is no sales income. This use of cash⁴ reaches its maximum if the product is successful in the market. Because, in case the new product is liked by the consumers, high amount of investments are needed to enter many distribution channels, to promote the product and to open up to foreign markets. After this stage, sales revenues will gradually start to meet the total investments made up to that time. This situation will continue until success in the market as a business, and after this stage, the business will only be able to achieve net profit generation success. Until this stage, the total investment amount will remain below the income earned. The reason why the curve, which is below the timeline in the figure and resembles a valley, is named the valley of death, is that the business faces bankruptcy risk if the business is in a difficult situation in terms of cash at any of these stages. For example, if the business will make a promotion at the market (entry) stage where it needs cash most, and if it does not have cash assets to enter the distribution channels, unfortunately it will have to close the business. Therefore, the management of the cash (liquid) assets of the enterprise during the establishment phase is of special importance.
6.4. Entrepreneur and Team Related Reasons
The most important task of the entrepreneur in implementation, starting from the business idea development stage, is to establish a team that has the necessary qualifications for the product / service he wants to produce. The main reason for this is to prevent the failures that may arise from the lack of knowledge, skills and experience of the entrepreneur and his team. The entrepreneur may not be experienced or well-equipped in all aspects of his business. In this case, he must bring together key people who will fill the gaps in the issues he lacks and be able to lead this team. In the absence of this, it is almost inevitable that the business will go bankrupt. Perhaps the most basic reason for the high closing rates seen in the chart above is the lack of quality of the entrepreneur and his team.
The level of experience and equipment of the entrepreneur and his team should be considered in several dimensions. The first thing that comes to mind here is the technical information about the work to be done. For example, problems such as lack of knowledge of financial planning in the founding team, inability to measure risks and insufficient cash planning will bring bankruptcy. For this reason, it is important that the entrepreneur and his team have the technical knowledge and work experience required by the product and the business management.
Another important issue about the entrepreneur and his team is related to managerial behavior. These employees are related to their work relations, the level of satisfaction they obtain from their job and strategic decisions. In this respect, the main task of the entrepreneur is to create a positive business climate for himself and his employees. Another point to be emphasized in this regard is about the management of expectations. Undoubtedly, the satisfaction of the entrepreneur from his job is closely related to his expectation on this issue. For example, a person who sees entrepreneurship as a form of opportunism might take extreme risks to put in one and get three and ultimately ruin his business. (Alpugan 1998). Therefore, entrepreneurs should set their expectations on the value they create and avoid ambitious and greedy behaviors such as earning a lot in a short time.
6.5. Environmental Reasons
The economic, social, cultural, legal and political environment characteristics in which the business operates are an important determinant of the success and failure of the business. All entrepreneurs should closely examine these environmental features and guide their strategic decisions according to environmental changes. It should not be forgotten that the environment includes developments that affect the business and have both opportunities and preferences. Therefore, a significant portion of the entrepreneur's time is devoted to monitoring and evaluating these environmental factors. While some of these environmental developments can be predicted with this monitoring and close monitoring, some unfortunately can develop very suddenly. For example, it is impossible for an enterprise dealing with animal food to be adversely affected by the sudden onset of anthrax disease. In such a case, the sales of the business may decrease to the extent that it becomes bankrupt. Therefore, unpredictable developments in environmental factors can cause the business to fail. However, changes in general economic conditions are more predictable by looking at some indicators. If these indicators are monitored regularly and necessary measures are taken, the negative effects of these changes can be reduced.