Why Start-Ups Fail


    Most Micro, Small And Medium Enterprises Do Not Live Long Enough Past Their Formative Years

    Research shows that most micro, small and medium enterprises (MSME’s) fail within the first three years after inception. MSME’s form the backbone of the Kenyan economy. Notably, through wealth generation, employment creation, entrepreneurship development and economic growth. Thus, the crucial role played by MSME’s cannot be underscored.

    According to an Economic Survey carried out in 2009, the MSME’s sector contributed to about 80 per cent of new jobs that year. It is common knowledge that organizations, small or large struggle to develop in an external environment characterized by uncertainty and turbulence. But the first question that comes to everyone’s mind is why MSME’s collapse in their formative years? What are the maladies that have proved dire to the growth and development of this important sector of the economy?

    Maladies to growth

    According to a report by the Kenya National Bureau of Statistics, three out of five businesses fail within their first three years. Why is this so? A number of challenges have been outlined that limit the growth of small enterprise in Kenya. They include lack of access to credit, infrastructure and communication and management skills among others. Indeed, lack of managerial accounting and technical skills are as much an obstacle to developing a small business as is the inability to access credit. Studies have shown that small enterprises may be short of knowledge needed to innovate and compete successfully. While Kenyans were engrossed by the prospect of a new dawn after the passing of the new constitution, authorities in the past few years have been silent on the issues that have continued to kill these small enterprises.

    While it would be wrong to undermine the influence of external factors, research show that internal malfunctions is to blame more for the collapse of these enterprises. Many of the problems faced by small businesses are inevitably centered on the founder. There are two key factors that impact on the way most of these SMEs are managed. First, decision making is concentrated on one or two people. Secondly, owners often work at both the operational and managerial levels and therefore acquire information about the market and the performance of their business through personal experience rather than relying on feedback mechanisms from their employees.

    Some people may argue that acquiring information through personal experience would do these enterprises more good than harm, but research shows otherwise. It has been found that where managers are directly involved in market survey the decisions they make are usually biased. This is expected bearing in mind that no one would start a business to fail. Everyone wants to be successful, and when that goes overboard, they are predisposed to make conclusions based on a wrong premise. One of the key qualities of good entrepreneurs is optimism. The problem arises when they become too optimistic that they ignore the influence of other factors. Most tend to feel that they are operating in a world where failure is not an option and they are lone players. However, the real scenario is different; allowing others to give their point of view regarding various factors affecting the business may open our mind to the real situations and other aspects that may have passed without our notice. We are therefore able to make better and informed decision.

    Besides, the approach which managers use to solve issues in a business is important as it shapes and guides the entire workforce. If decisions are made recklessly based on whims rather than knowledge, the results may be disastrous. The key issue in managing a small enterprise is ensuring that the plans and programs implemented are well analyzed so that they may not spell doom to the business. A simple mistake in the operation department, for instance, targeting the wrong market may take the breath out of the firm. Achieving the right balance and being succinct, hitting the nail on the head is paramount, as every mistake counts and may cost the business dearly.

    What can be done?

    Despite the high rate of MSMEs failures, their contribution to the economy growth cannot be ignored. Therefore, in order to successfully establish and manage them, there are many crucial decisions that must be made. Many of these decisions relate to sourcing of capital and ensuring that it is utilized in a manner that results in the optimal growth, success and profitability of the entity. To achieve that objective, it is necessary for the entity to have people with financial management and accounting skills. The fact that the failure rate of one in every three enterprises is evidence that interventions to reverse this scenario is needed.

    Moreover, the government should create a favourable environment to allow easy access to credit. SMEs should also develop good relationships with financial institutions because lenders can be their only source of finance. It is worth noting that the growth and expansion of micro lenders institutions in the country has helped revolutionize the financial sector. Establishing adequate credit lines is another solution. Small enterprises should establish their credit lines in advance rather than waiting until need arises.

    Formulating a strong cash management policy is paramount. Poor cash management is the most common reason for the failure of some enterprises. They should know about their daily cash positions by regularly checking their cash and bank balances. This means preparing regular cash flow statements and monitor cash inflows and outflows. Sufficient profit must be retained in the company to see it through difficult times and to be able to conquer perils that are inevitable. This calls for financial discipline and aptitude in the management as a tool to prevent the firm from financial dilemma.

    In a nutshell, the massive infrastructural development by the government should be able to propel MSMEs to greater heights. The new constitution acknowledges the important role played by small enterprise in our economy and that is why the law is streamlined to support such ventures. However, at the end of the day, it is how much that entrepreneurs are able to make use of available resources and entrepreneurial skills that determine how high they will ride.