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The Main Reason Businesses Fail

By Mike Myatt, Chief Strategy Officer, N2growth [caption id="attachment_17" align="alignleft" width="158" caption="Don't end-up like this..."][/caption] What really causes businesses to fail? These tough recessionary times have many pondering the answer to this question as we watch...

By Mike Myatt | Updated on July 16, 2009

By Mike Myatt, Chief Strategy Officer, N2growth

What really causes businesses to fail? These tough recessionary times have many pondering the answer to this question as we watch businesses fail on a daily basis. I don’t believe there’s too much debate among “the experts” that the most frequently cited cause of business failure is a lack of capital. While the recent events in the capital markets might lead you to believe it’s true, capital while clearly a nice luxury, isn’t a necessity (here I go picking on “the experts” again). You see, I have witnessed well capitalized ventures fail miserably, and severely under-capitalized ventures eventually grow into category dominant brands. A lack of capital can provide a socially acceptable excuse for business failure, but it is not the reason businesses fail. That being said, the unfortunate reality is that well more than 50% of all new business ventures fail within the first three years, and especially during tough economic times, many mature, even once category dominant companies fail over time. In today’s post I’ll share my opinion as to the real number one reason why businesses fail…Let’s begin by putting a fork in the lack of capital excuse…While it may be every entrepreneur’s fantasy to launch their business with 5 years operating reserves in the bank, the reality is that this very rarely happens. Additionally, it is not really the amount of capital a venture secures, but rather the relationship between the amount of capital raised and identified capital requirements…as we’ve all watched in recent months, the real issue is not how much capital you have, but rather how effectively the capital is deployed and managed.I would go so far as to say that well capitalized start-ups may have a higher mortality rate than their thinly capitalized counterparts. When capital is a scarce commodity, each spending or investment decision tends to be made with great care. A lack of capital forces entrepreneurs to prioritize their decisions, and to focus their efforts on high impact areas. Well capitalized ventures on the other hand often make ill-advised decisions, and frivolous expenditures that lower margins and increase commitments to overhead creating unnecessary operational burdens on the enterprise.The reality is that you can ask 10 different people why businesses fail, and you’ll likely receive 10 different answers. While each answer could well be a contributing factor to the demise of a business venture, there is in my opinion one singular cause for all business failures…a lack of sound leadership. When I refer to leadership in today’s context, I’m pointing specifically to executive leadership as represented by the entrepreneur or CEO. In the 10 points listed below I’ll examine some of the more common reasons attributed to business failure, and I’ll likewise assess the roles and responsibilities of leadership as they pertain to the following reasons:

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