The global economic downturn cut a swathe through start-ups in most developed countries. But not Australia.
As Amanda Gome noted earlier this week, Australian Bureau of Statistics figures for the 2007 to 2009 period – the height of the crisis – demonstrate that the death of the Australian small business has been greatly exaggerated.
There is much heart to be taken from the ABS report, but also some salutary lessons. We crunch the numbers to give you the top 10 lessons start-ups can take from the last three years to ensure they don’t become another statistic.
Becoming your own boss is taken in a very literal sense by the 1.2m sole traders and independent contractors in Australia. These businesses don’t become any employees’ boss and, in many cases, flourish from this ultimate independence.
However, the ABS figures suggest that having someone to do the start-up tango with is a worthwhile idea. Non-employing businesses had an exit rate of 19.6% between 2007 and 2009, nearly double that of any other kind of business. Companies that set up as a ‘sole proprietor’ also compared badly, with a start-up survival rate of just 63.1% between 2007 and 2009 compared with 75% of partnerships. The moral of the story is to consider getting a partner on board to share the load when starting up.
Setting up a business as a trust is an option overlooked by many budding entrepreneurs, but that situation may change if trends highlighted in the ABS report continue.
Trust-based businesses, created so that a trustee runs the company on behalf of beneficiaries, had a higher survival rate than any other business type between 2007 and 2009, with 79.8% of start-ups lasting the distance.
Although trusts can be complex entities to create, the tax flexibility of the genre appears to have paid off during the economic downturn.
The survival rates of start-ups since 2007 has been directly linked to the number of workers employed. Sole trader start-ups had a 67.8% survival rate and those employing one to four members of staff, usually referred to as ‘micro businesses’, had a 79.9% survival rate.
By contrast, survival rates edge up the larger the company becomes – firms with five to 19 staff had an 85.3% chance of remaining in business, with the figure rising to 86.5% for companies with more than 20 employees.
While the situation is tough for small firms, the lesson is clear – if you manage to grow your business sustainably, your chances of survival are significantly higher.
While the ABS report suggests that bigger is generally better if you want to maintain the life of an entrepreneur, there is a notable caveat.
Of the businesses that started up in 2007, those that employed over 200 people had less chance of making it through the next two years than those employing one to four people – a survival rate of 78.4% compared to 81.2%.
This lack of longevity was only second in failure rate to sole trader start-ups, with a third of these firms folding in the two-year timespan.
It appears that the mantra of starting large and getting larger isn’t quite working out for many Australian businesses. The current economic climate suggests that being small and flexible can prove more advantageous.
Small start-ups that target the business-to-business market usually aim for medium to large-sized clients with at least 50 employees. The ABS results suggest that this may be counter-productive.
The vast bulk of businesses in Australia employ between one and four members of staff or no staff at all. Just over 80,000 employ between 20 and 199 workers, with less than 6,000 having more than 200 people on their books.
The largest growth is in the five to 19 employee range – up by 4,000 to 218,000 despite the downturn – so why not sell to this burgeoning market?
If you are weighing up whether to launch your business in Sydney or Melbourne, why not try a third option – Hobart. Tasmania was the kindest state in Australia to start-ups between 2007 and 2009, with 75.7% of new entries surviving the two-year period.
South Australia completes and unlikely top two with 73% of start-ups weathering the GFC storm to remain trading by the end of last year.
At the other end of the scale, the ‘boom’ states of Western Australia and Queensland haven’t been as kind to start-ups. Just 71.8% of Queensland start-ups lasted two years, with 71.7% of WA firms following suit.
Both states, however, fared better than New South Wales. The state, suffering from an economic lag compared with the rest of the country, had a 70.3% survival rate for start-ups.
If you are planning to start-up a hotel, clothes shop or even a mining company, you should be reassured to know that the odds are in your favour.
During the GFC, start-ups in the mining, retail, accommodation and food sectors fared best, with survival rates all above 75%.
Retailers may currently be concerned about interest rate hikes and hotels are jittery about a reported drop-off in overseas tourists visiting Australia, but savvy start-ups in these sectors have as much chance as ever at making the grade.
If your entrepreneurial zeal is focused on the arts, safety, recreation or administration, look away now. Survival rates for businesses in these sectors were less than two in three during 2007 to 2009.
But don’t pick up your miner’s helmet or retail mannequin just yet – start-ups in the above sectors can learn from previous mistakes and succeed if they provide something new and meet a consumer need.
As much as the business landscape has shifted in the last three years, one thing remains the same – cash is king.
In probably the least surprising revelation in the ABS report, the figures show that the businesses with the highest turnovers are more likely to survive.
Just 58.7% of start-ups with an annual turnover of less than $50,000 made to June 2009, while the proportion of firms still in business rose in correlation to their income.
A fraction under 90% of start-ups with an immediate turnover of $2m or more survived to 2009. The other 10% are probably sore from kicking themselves in wonderment at what went so horribly wrong.
