What causes most entrepreneurs to fail in becoming an established business?
ABSTRACT
The majority of entrepreneurs fail in becoming an established business, and many reasons may contribute to their failures. Many studies indicate that entrepreneurs might be impacted by different factors that eventually lead to failure. The purpose of this research is to explore the factors that might cause entrepreneurs to fail in becoming established businesses. According to the research, absence of motivation, poor cash flow, and incompetent organizational skills may be the factors that cause entrepreneurs to face failures. The results suggest that entrepreneurs who are affected by one of these factors or more may not be able to reach the stage of an established business which is a business of more than three and a half years.
INTRODUCTION
Ninety percent of entrepreneurs who build startups will fail (Patel, 2015). This is the truth of what most entrepreneurs are expected to face in the present day. Entrepreneurs are challenged by countless obstacles with a tremendous amount of pressure to survive in the heavily competitive market. While entrepreneurs are very optimistic concerning the ideas or solutions they bring into the market, most of them are not successful with the direction that they have decided to move towards. K Vaitheeswaran, a co-founder of the first e-commerce business in India called Fabmart.com, states that the path that entrepreneurs are on is difficult and there are many causes that make startup failed (Chengappa, 2017). A number of people desire to become an entrepreneur, but only some are successful in becoming one (Chengappa, 2017). It is crucial to know the causes that contribute to the failure of entrepreneurs and how can entrepreneurs avoid making the same mistakes that other entrepreneurs make. Thus, this research may potentially help future entrepreneurs to have a higher chance of survival, become successful, and established a sustainable and viable business. Some researches identify the factors that make entrepreneurs failed, but most of them contain various reasons that lead up to the failure, which is not condensed into one focused research in a specific timespan. There are 80% of entrepreneurs who failed their businesses in the first 18 months (Wagner, 2013). Research of a specific timespan is required to fill in the gap that is missing from other research. The factors that cause most entrepreneurs to fail in becoming an established business are lack of motivation, negative cash flow, and poor organizational skills.
BACKGROUND INFORMATION
Entrepreneurs can be difficult to define, and there are many definitions used to describe an entrepreneur. However, an entrepreneur can only be described in one simple definition. An entrepreneur is the one who recognizes any need and satisfies it (Nelson, 2012). Entrepreneurs could also be categorized into four stages. Potential entrepreneur, nascent entrepreneur, new business, and an established business (Global Entrepreneurship Monitor, n.d.). In addition, the established business stage is defined as an entrepreneur who establishes a business for more than three and a half years (Global Entrepreneurship Monitor, n.d.). In the recent years, there is an increase in entrepreneurial activity in some countries. In the United States, venture capitalists have invested their money in 3,995 deals, which totals to 29.4 million dollars in the year 2013 (Wade, 2014). By comparing to an earlier year, the growth is up by 7% in dollars and 4% in the number of deals (Wade, 2014). A successful entrepreneur can fuel the society with value and economic sustainability. However, the obstacles and challenges that entrepreneurs faced are proved to be harsh for them to survive. This causes most entrepreneurs to fail their business fairly quickly. By compiling a list of startup failure post-mortems to identify the causes of failure for startups, the top 20 causes are lack of a market need (42%), cash burnout (29%), incorrect team (23%), failed to compete (19%), problems with pricing or cost (18%), product unfriendly to the user (17%), make a product without a business model (17%), substandard marketing (14%), customers ignorance (14%), inappropriate timing for the product (13%), cannot focus (13%), no harmony within the team or investors (13%), bad decisions (10%), no passion (9%), failed to expand geographically (9%), lack of financing or investor (8%), legal difficulties (8%), lack of networking (8%), burnout (8%), and failed to make changes (7%) (CB Insights, 2018). This data may provide a glimpse into the issues that entrepreneurs are facing every day, which might eventually make them fall into one of the categories. The significance of this research is to identify what might cause entrepreneurs to fail in becoming an established business, which covers a specific timespan. It is important to identify the causes early, so entrepreneurs who currently have a business under three and a half years old can recognize the problem and take action on that particular problem. This research may also help people who are becoming an entrepreneur to avoid failing which can increase interest and entrepreneurial activity in the country or region as a whole.
1. LACK OF MOTIVATION
Motivation is key to the success of entrepreneurs, but most entrepreneurs lack the motivation to move forward as they may face failures and obstacles on their way to success. Performance of a firm can be affected by the lack of motivation of entrepreneurs which could make the firm face with unintended failure in the future if the matter is left overlook for a certain period. A study by Waita and Namusonge (2013) indicates that performance of a company may improve by focusing on promoting entrepreneurial motivation of the employees in various factors. Motivation is crucial for keeping entrepreneurs to be focused on achieving the goals that are set by the initial factors of motivation when they originally started the business. Entrepreneurs are affected by many motives when starting the business and the types of motive may determine the will to continue or discontinue the business altogether (Staniewski and Awruk, 2015). When entrepreneurs are facing various problems constantly, maintaining the motivation is essential in keeping the business running. Zimmerman and Chu (2013) suggest that most entrepreneurs in Venezuela have a motivation to increase their income when running a business despite the less developed economy they are facing continuously. Each source presents different angles of motivation as a factor that can impact many areas of both the business and entrepreneur which signifies the importance of maintaining or having motivation when running a business. The author agrees with the findings presented as many entrepreneurs decide not to continue their business since they lose motivation in the process of building a business which causes the company to suffer in performance and face closure in the end.
1.1 Motivation and performance
Performance of an entrepreneur that reflects on a business may be correlated with the motivation of the entrepreneur. If an entrepreneur is motivated in an environment that requires performance, he or she may thrive in this particular environment. In the culture that focused mainly on performance, an entrepreneur who is positively motivated is more suitable and competent in this kind of culture (Hopp and Stephan, 2012). If entrepreneurs require having a high performance in themselves or their business, motivation is the key to unlock that level of performance. Moreover, the motivational behavior of the entrepreneur may affect the business performance directly. The motivation of an entrepreneur may correlate with the performance of a business from the empirical evidence given (Jayawarna, Rouse, and Kitching, 2011). Business performance may rely on the motivation that entrepreneurs have on a daily basis, and it may also mean that if an entrepreneur did not have the motivation to do the business, the company might expect to fail. The motivation of the entrepreneur who runs the business could be a factor that impacts the level of performance of a company as a whole depending on the level of motivation that the entrepreneur has.
1.2 Motivation provides focus on goals
The initial factors that influence entrepreneurs to have the motivation are crucial for keeping entrepreneurs to focus on the original goals. The first reason that an entrepreneur has is the reason that drives motivation for an entrepreneur to keep moving forward. While the goal of an entrepreneur or the path towards an opportunity is important, motivation is needed to achieve the goals or to utilize the opportunity (Carsrud and Brännback, 2011). It is important that the entrepreneur has a clear focus on the goal and move towards it with motivation as the energy. In addition, the entrepreneurial behavior may be influenced by the motivation of an entrepreneur in pursuit of a goal. The motivation that Steve Jobs has largely impacted the founding of Apple in pursuit of an opportunity to build the PC (Shane, Locke, and Collins, 2012). The original goal is a strong driver that creates motivation that could keep an entrepreneur to always move towards a specific goal in mind. Motivation is required to drive the entrepreneur towards a goal, and it may be a factor that keeps the entrepreneur to focus on it.
1.3. Maintaining motivation to sustain business
An entrepreneur needs motivation in running a business on a daily basis to sustain the company long-term. For a business to be successful, motivation is a factor that helps the entrepreneur achieve the dream of running the business successfully. Winter (2010) states that there is much research that shows the positive correlation between achievement motivation and business success in entrepreneurial roles. The sense of achievement gives motivation to the entrepreneur to successfully run a business long-term. Furthermore, the habit of staying motivated is also a deciding factor in the failure or success of a business. If a person always has the habit of being motivated, this is a behavior that differentiates a disappointment and triumphs of small business (Hendricks, 2015). So, it is vital to stay motivated as a habit to be able to make a business survive and thrive. By always keeping the motivation high, an entrepreneur can succeed in the business fairly well in which motivation can come from the achievement in business and well-trained habits.
2. NEGATIVE CASH FLOW
Cash flow, which includes funding, is crucial for every entrepreneur to start off their business and to keep the business afloat. Entrepreneurs or ones who are starting a business perceive many obstacles including funding as one of the main hardships. Out of many hurdles reported, the students who are looking to start a business mentioned that funding and professional experience are needed to run their business (Staniewski, 2009). In addition, lack of stable cash flow could cause businesses to fail by eventually run out of money. CB Insights (2018) indicates that one of the top causes that make startups fail is simply lack of cash to continue the business. Moreover, small business is what most entrepreneur initially starts off by using funds of their own, but lack of cash flow is an issue that often kills small businesses. Pofeldt (2015) implies that by always checking the status of the cash flow of a business, the firm might be able to grow with increased revenue. The sources give a clear understanding of the issue that entrepreneur could encounter when running a business regarding the matter of cash flow. The author finds that the findings have a precise approach to the problem, and they are valuable in understanding the cause which might lead to the failure of a business.
2.1 Lack of funding
Funding is one of the main hardships that entrepreneurs are likely to face when setting up or running a business. People who experience a shortage of funds in running a business may be unconfident in their journey of being entrepreneurs. Many young people usually perceive themselves with a shortage of funds, experiences, and proper knowledge in starting or running a business which might cause them to feel insecure in the venture (Staniewski and Awruk, 2015). With this kind of behavior or mindset, entrepreneurs cannot succeed in the business they are pursuing which signifies the importance of appropriate funding of the firm. Furthermore, funding could be allocated to other parts rather the business itself to help entrepreneurs have the right education when conducting businesses. Staniewski and Awruk (2015) state that the financial aid which entrepreneurs receive might have greater use in allowing entrepreneurs to participate in training and other programs rather than funding the business. Soft skill is an important skill set that every entrepreneur should have and by refining these skills, entrepreneurs might have an easier chance of conducting a successful business. Thus, the importance of funding is critical in training entrepreneurs to have the right knowledge as well as having the sense of security when running a business.
2.2 Lack of stability in cash flow
A well-managed cash flow gives a business its foundation to grow and outperform competitors. Firstly, the foundation is critical for every business to have which also requires sufficient funding and good usage of cash. CB Insights (2018), suggests that insufficient cash of failed startups may relate to other causes which include the process of finding the customer of a product and fail to make the right changes to the business. As a company struggles to find its foundation, the firm might eventually run out of cash to do the necessary change to survive in the market. Secondly, having a more stable cash flow can help the firm survive and get ahead of the competitors. By having a well-managed cash flow, a company might be able to surpass its competitors with additional benefits of higher shareholder value and a lower chance of facing operational and financial risks (Deloitte, 2014). If an entrepreneur could manage his or her cash flow, the company may have a higher chance of surviving in a competitive market. The matter of stable cash flow is a topic in which every entrepreneur should have in mind when doing business as it may lead to a great foundation of prosperity and survivability in the market.
2.3 Poor cash flow leads to failure of small businesses
A small business is a starting point for some entrepreneurs who are looking to have a higher income, but the lack of cash flow could potentially fail the business. A small business might struggle to keep up with cash flow management which may cause the company to miss an opportunity to make a profit. Pofeldt (2015) mentioned that a company of any size might experience a problem concerning cash flow if the firm does not manage cash flow well enough. The important fact is that whether the company is large or small, a problem of cash flow could occur to any firm with poor cash flow management. Additionally, cash flow optimization may help the entrepreneurs to revive a business from the crisis that they might encounter. BDC (n.d.) states that Bonté Foods survive the problem concerning cash flow by carefully looking into the matter and apply extensive evaluation of the structure that the company has, including improvements. Entrepreneurs require looking deeper into the cash flow that they have and restructure it which might help the company to avoid closure. To summarize, poor cash flow may present an issue that could make a business fail, but if it is well-managed, the company could avoid failure and come out from a bad state.
3. POOR ORGANIZATIONAL SKILLS
Entrepreneurs may not be able to succeed in business without possessing outstanding organizational skills. To succeed in business, entrepreneurs require having an exceptional understanding of how to organize a business using their organizational skills which is one of the skills that entrepreneurs must have. Entrepreneurial skills, including organizational skills, is the foundation of the success of a venture or business which includes the starting point, growth, and funding (Adeyemo, 2009). By having poor organizational skills, entrepreneurs could potentially face failure in business while other entrepreneurs with the skills succeed. Bonnstetter (2013) mentioned that to attain the desire achievement or goals, having planning and organizing skills are crucial, but most entrepreneurs do not have these skills in them to succeed. As entrepreneurs often venture into new businesses, the right education can help to enhance the organizational skills of the entrepreneurs which lead to the success of the venture. Elmuti, Khoury, an Omran (2012) find that knowledge acquired from entrepreneurial training have a positive correlation to improved organizational efficiency which may lead to a successful venture. The sources provide clear and valuable insights into the effects of poor organizational skills and factors that could help entrepreneurs improve their business ventures. The author concurs with the findings found in the research which could provide the understanding that entrepreneurs could be looking for in the matter of avoiding business failure by having poor organizational skills.
3.1 Organizational skills required to succeed
Success could be a result for entrepreneurs who possess adequate organizational skills. Education can be defined as an investment for entrepreneurs to achieve success in the future, especially for their entrepreneurial ventures. Unger, Rauch, Frese, and Nina Rosenbusch (2011) indicates that there is a statistically significant correlation between human capital and the success in entrepreneurship. While entrepreneurship education may be overlooked by both people who want to be entrepreneurs and entrepreneurs, it is important to realize the fact that knowledge in oneself is beneficial to become successful in entrepreneurship. Moreover, communication as a part of organizational skill could improve the overall efficiency of the company which can lead to success. Root III (n.d.) states that communication is crucial for an organization to accomplish tasks efficiently which requires managers to relay information to other employees at various levels accurately. Organizational skills are more than just organizing people to the task; they are a combination of skills that work together to create a perfect harmony for the success of entrepreneurs. To sum up, organizational skills might help entrepreneurs to become successful if they invest themselves in entrepreneurial education and utilize the knowledge to its capacity.
3.2 Lack of organizational skills leads to failure
The lack of organizational skills could cause a business built by entrepreneurs to fail. Most entrepreneurs do not have the necessary organizing skill to manage a business which could lead to inefficiency in an organization. Bonnstetter (2013) finds that most entrepreneurs do not have planning and organizing skills and this may cause entrepreneurs to be at a disadvantage to other entrepreneurs. If most entrepreneurs fail to become an established business, the lack of these skills may hinder entrepreneurs to be at that stage while few entrepreneurs with the necessary skills succeed in doing so. Furthermore, planning is one of the essential organizational skills that may cause businesses to fail due to ineffective planning strategy. More than 60 percent of organizations do not have effective strategies for their businesses, including a strategy to lead (Wellins and Canwell, 2018). A plan or a strategy should be one of the top priorities for entrepreneurs when running a business which may help to avoid having to face failure as most companies do from the lack of planning. In conclusion, by possessing the required skills and effective strategies that few entrepreneurs have, the business might be more efficient and may have a lower risk of closure than most companies.
3.3 Successful venture by entrepreneurial education in organizational skills
A successful venture could be possible by entrepreneurs with the help from proper entrepreneurial education, particularly in organization skills. Organization skills are necessary skills for entrepreneurs to become successful in their ventures. Elmuti, Khoury, an Omran (2012) states that entrepreneurs are required to have three unique skills for success, including organizing skills which fall under technical skills, and entrepreneurs can obtain these skills by engaging in impactful entrepreneurial education. Education in entrepreneurship could return an excellent yield for entrepreneurs especially if they receive efficacious organizational skills for a venture. According to a study by Stamboulis and Barlas (2014), apart from financing, product, and research and development, management is one of the factors that are essential for the success in entrepreneurship. As organizing is one of the functions of management, receiving an education to improve this specific skill may contribute to a successful venture of entrepreneurs. To conclude, having the required skills of organizational skills through entrepreneurial education may help entrepreneurs to avoid failure in their ventures and lead to their desired success.
DISCUSSION
Most entrepreneurs may walk on a path filled with difficulties along the way which might hinder entrepreneurs in making to the stage of an established business. Thus, this research paper aimed to identify the factors that cause entrepreneurs to fail in becoming an established business. When running a business, entrepreneurs may find themselves in a state of losing motivation by the obstacles they are facing along the way, which might cause a negative impact on the performance of a firm and lead to closure as entrepreneurs do not have the motivation to focus on the goals to sustain the business. Moreover, negative cash flow could be a factor that affects the survivability of the business as entrepreneurs may fail to manage their businesses’ cash flows which may cause the company to be unstable and require additional funding to survive. Furthermore, organizational skills may be required by every entrepreneur to succeed in the business in which most entrepreneurs lack these skills and cause them to face failure in the end. These findings agree with Zimmerman and Chu’s (2013) research on factors that contribute to the success of entrepreneurs in Venezuela, the problem that they faced, and the motivation that drives them to pursue entrepreneurship. Nevertheless, this research topic requires a deeper analysis of each factor that affects entrepreneur’s failure which may also be influenced by other aspects not stated in this paper.
CONCLUSION
While there are many studies concerning the factors that cause entrepreneurs to fail, most studies do not provide a focus on a specific stage of entrepreneurs who are running a business for less than three and a half years. If the factors that cause entrepreneurs to fail in becoming an established business are not thoroughly explored, this may lead to a high rate of failure in their businesses. Thus, this topic requires further studies on the factors mentioned in this paper which can provide a better understanding of the success and failure factors affecting entrepreneurs when operating a business. The findings of this research could help entrepreneurs to be aware of the factors that might cause them to fail in reaching the stage of an established business, which in turn might contribute to a higher probability of success in the business. To conclude, there are various factors that may cause entrepreneurs to fail in becoming an established business. Hence, being aware of these factors is crucial to the success of a business. Current and future entrepreneurs may need to recognize these factors and avoid making the same mistakes that most entrepreneurs might have done before. Therefore, having the knowledge of factors that may cause most entrepreneurs to fail is vital for both current and future entrepreneurs.
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