Exploding start-up myths

Does your company sell to other businesses? In that case, make sure you read the latest copy of the Australian Bureau of Statistics’ Australian Business Entries and Exits.

For one, it gives you an idea of the size of the business marketplace in Australia. And secondly, it puts to rest that appalling business myth (which I still hear quoted) that four out of five businesses fail.

Let’s start with the failure rate. It’s actually pretty good. In fact, I reckon you have a better chance of making a fist of a small business on these statistics than you do of climbing the greasy pole at a corporate!

Of the 2.07 million businesses operating in June 2007, 85% were still there a year later and 74% two years on.

Of the 316,867 business entries in 2007-08, 71% were still there a year later. And we don’t know why those who weren’t still there bowed out. Maybe they sold. Maybe they merged. Maybe the business owner inherited a fortune and is living in Switzerland.

Of course, some failed. But what is failure? What if you start a business and realise six months in you need to change course, so you shut down that business and start another. Is that failure?

My point is that most people who start a business succeed.

The other interesting statistic is that the survival rate for start-ups was highest for those businesses with annual turnover of $2 million (85.6%) and lowest for those businesses with less than $50,000 (65.6%).

And the survival rate for start-ups is higher for new employing businesses (82%) than for new non-employing businesses (67%).

Now, that is counter-intuitive for a start-up. Start-ups are often told to start small, not take in money and to avoid employing staff.

But if you start smart, with experience in your industry, networks, contacts, some decent money behind you and a few employees, such as sales and operations people, you have a very good chance of being around a few years later.

Not even the GFC had a big impact on business failure. The entry rate for new businesses during ’08-’09 was down slightly, from 15.3% to 14.4%, presumably because the GFC deterred people from starting their own companies.

However, exit rates remained steady at 15.4% for 2007-08 and 2008-09.

The other point that businesses that sell to other businesses need to understand is the size of the marketplace in Australia.

There are only 6,349 businesses in Australia with more than 200 employees. That is less than 1% of all Australian businesses.

Even the so-called mid-market is quite small, with only 84,000 companies (10% of all businesses).

Companies selling to large and mid-market companies have about 90,000 companies on their radar. Given that there are 2 million enterprises in Australia, where are the rest of them?

Well, 1.2 million businesses employ no one but themselves. While some of this group may have just hung out their shingle and will grow into sizeable enterprises, many are really self-employed. This includes the hobbyists, the independent contractors, the tradies, the mums on maternity leave and so on.

Then there is the micro sector, businesses that have 1-4 employees, which comprises 497,098 (68%). And then the sweet spot: the 233,957 (32%) businesses that have 5-19 employees and are likely to either grow into a medium-sized business or sell.

Why is this important? Well, I can’t tell you how many businesses say to me: We want to sell to companies with more than 200 staff.

They have no idea how few of those there actually are in Australia, and many are far better off targeting a few rungs lower – the fast-growing 5-19 employee bracket and the 20-200 bracket – to get volume and quality.

Conversely, some business owners tell me that they are targeting Australia’s 1 million small businesses, lumping fast-growing companies with 10 employees in with the micro hobbyist, when they have almost nothing in common.

Despite all the negative headlines, the GFC hasn’t decimated the start-up sector in Australia. Indeed, there are plenty of opportunities for smart start-ups to grow to the size where survival rates are more favourable. Don’t be daunted. Go for it!

This article first appeared on StartupSmart, Australia’s top site for people looking to start a business.