Tuesday, July 7, 2009

Demystifying Failure in Small Businesses

I just finished reading a book that will be published in late 2009. What a fascinating read. The author, Dr. John Watson has embarked into a review of success and failure on Small and Medium Size businesses (known as SMEs). Read on to be surprised!

He has spent years evaluating, among other things, the myth of the high failure rate. Someone said a long time ago, that the failure rate of SMEs was 80%. I have heard this statistic in the U.S.A, where supposedly the rumor originated, in Chile, Venezuela, Mexico, Guatemala, Australia and even in Bahrain! So much for globalizing failure rates!

What striked me most was the consideration that a business closure was not a sign of failure. It is one of those reflections where one realizes that common sense is not that common. John found time and again that the closure of businesses could be ther result of many non-failure related decisions: the owners may decide to close a company to retire or to separate pieces of the company to sell separately (I have done both). they might also sell to move on to other ventures or to do something else (been there, done that too). Of the 9 companies that I started, I have sold 5 and I have closed 2 at a personal loss. So, my personal stats are 12% ... I have worked with hundreds of entrepreneurs some in the most uncertain circumstances: taking innovations into markets outside of a corporation, the 80% failure rate is a myth.

John statistics prove that the failure rate of SMEs, at least in Australia using his work and revising many others, is 3-28% with a peak at 3 years, where companies that are less profitable compel the owners to take two actions: either reinvent (aha! I also had to do this) or closed (in my case, one closed one on year 2 and the other on year 4).

Demystifying SME's failure rates is very imporant for entrepreneurs to be, policy makers and for the community in general. With the current economic crisis, chances are that many people will move to start a business, yet, more than ever, we need entrepreneurs, not to form companies, but to create wealth ... right?

That is why we are turning our company to a Wealthing company.... more to come soon...

I hope John's work will help reshape the way you view SMEs, it has changed mine.


PD: Next week I'll cover his work on performance!


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