While failure among new businesses is seen as a near-guarantee, with unattributable stats and quotes touting a 90% failure rate, this isn’t the whole story. In fact, after searching for hard evidence of this statistic, I’ve come up dry.
“90% Of Startups Fail!” – Every Click-Bait Startup Article
So, what do the real numbers tell us about the rise and fall of startups? According to Cambridge Associates, a global investment firm based in Boston, the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even at the height of the dot-com bust of 2000, the failure rate maxed out at 79%. Although venture capital-backed startups are viewed as the cream of the crop, failure seems to be less common than some “scare quotes” would have us believe. But even if these more favorable statistics are just the result of looking at numbers through rose-tinted glasses, what’s the takeaway?
What Drives Failure (or Success)?
CB Insights regularly posts updates to their Startup Failure Post-Mortems report. Beyond the most common (and obvious) reason cited, no market need, at least 72% of the reasons given by founders are directly related to financial literacy and/or business acumen. In short, bad financial decisions can cripple and even destroy an organization. Given that the majority of failure is driven by poor financial decisions, how can we empower our leaders and colleagues to make better business decisions?
Profit, Cash, and Expenses
Sustaining a successful business hinges on more than sales, revenue, and overhead. While keeping a close eye on each of these is a good idea, there’s much more value in understanding the interplay of these numbers as well as how other financial statement metrics measure the health of an organization.
Here are three basic financial concepts that every leader should take into consideration.
- Margins. Anemic return on sales will inevitably hinder an organization's growth and could lead to its demise.
- Cash Flow. Without enough cash on hand to pay employees and utilities, an organization may be forced to borrow money to keep the doors open.
- Expenses. If more is going out than is coming in, your business is not profitable. While there may be months and even quarters that aren’t profitable, too many of these can be a serious issue.
Knowledge Is Power
Understanding how to measure the financial health of your organization can empower you to make informed, strategic decisions. Forecasting and planning without a keen understanding of how key performance indicators measure these efforts makes it nearly impossible to hit the mark.
Test your financial literacy with our Business Acumen Quiz.