Entrepreneurial success is not the result of a single person’s efforts. There is always a team involved. The team is made up of other investors, working partners, employees, vendors, and clients. All play an important part in the success of the enterprise. Although other people are involved, there is a tendency to believe that they play far less important roles and are easily replaced. At the end of the day, success or failure of the enterprise will be largely attributed to the entrepreneur.
Because of limited resources, high levels of uncertainty and inexperienced management and employees, new ventures suffer from a very high rate of mortality- much higher than that of larger, well-established firms. There are a number of reasons for failure of a new venture, which are discussed below. Usually, there is a combination of reasons rather than one single reason.
1. Lack of Experienced Management:
One of the main problems faced by new enterprises is that the management team is usually very new to this role. The entrepreneur and his/her top management usually have no prior record of being in charge of the fortunes of a whole company.
Even in some rare cases, when the management has some individuals who have led a company in the past, they are now faced with a new situation where the company itself has no previous track record. It is a very different kind of situation.
2. Few Trained or Experienced Manpower:
Shortage of skilled and experienced manpower is faced by new ventures, which represent a riskier job opportunity. Most people prefer to work with a well-established organization employing hundreds of employees and having a stable track record.
New ventures are also reluctant to use manpower for and to invest in training. Lack of experienced and skilled manpower can lead to a general drop in productivity and quality of output. The absence of quality manpower is particularly felt during a crisis.
3. Poor Financial Management:
Operational issues keep an entrepreneur busy and as a result, financial management is likely to get neglected. Often, the entrepreneur may find the technicalities of accounting and finance intimidating and avoid looking deep into it. Common errors in financial management can be bad receivables management, unproductive investments, and poor budgeting decisions.
4. Rapid Growth:
Sudden unplanned growth is not always a desirable situation. Higher growth will mean greater stress on production facilities, manpower, and marketing channels. Sometimes, these will not be designed to cater to the rise in volumes and might need further capital investments. It will lead to a stage of continuous fire-fighting and ultimately, many things may not keep pace with the growth. Most commonly, the organization may run out of money.
5. Lack of Business Linkages:
Existing working relationships with vendors, customers, and others is a huge advantage to established businesses. A new venture will have to forge new relationships and work hard at strengthening them before coming to an equal footing with the entrenched players. Such business linkages help in smooth conduct of business and are invaluable at times of distress.
6. Weak Marketing Efforts:
Entrepreneurial firms are very reluctant to spend on marketing efforts. Investing in a marketing campaign is not going to give you assured returns and the link between the marketing expenditure and the sales is not very easy to establish. An investment of Rs. X in raw material will give you a very tangible Y kg of output but a similar investment of Rs. X in a newspaper insert will not give you a sale of Y units, which you can demonstratively tie into the newspaper insert.
7. Lack of Information:
Even in this era of free-flowing information, the quality of information available to large corporations is far superior to that available to new small entrepreneurial ventures. There is a cost to information and small ventures may not be able to invest so much in getting the high-quality information.
For example, before entering a new market, the new venture may send some salespersons to interview some customers, shopkeepers, and wholesalers. On the other hand, the large corporation may engage the services of a market-research firm and carry out a thorough investigation of the potential and the problems of the new market.
8. Incorrect Pricing:
An entrepreneur does not pull the pricing out of thin air, but it may not be very rigorously thought-out either. The price is most likely close to that of the competition and takes care of costs leaving a modest or seemingly generous margin.
There are many sophisticated pricing policies a new venture can adopt, taking into account its cost structure, nature of demand, and extent of competition. The entrepreneur can introduce new innovative pricing systems too. For example, Deccan Airways revolutionized airline pricing in India by introducing low-priced seats and yield management techniques are being used by low-cost earners in Europe and the USA.
9. Improper Inventory Control:
Improper inventory control can lead to myriad problems. Production can be halted due to insufficient inventory, whereas excess inventory can lead to wastages and damages. In case of perishable goods, high inventory can lead to expiration of stock. In high-tech industries or industries influenced by fads, goods become obsolete very soon. Inflated valuation of inventory can give a very wrong picture of the financial position of the firm.
10. Short-term Outlook:
A number of small new ventures face huge problems on a regular basis. In the early days of a firm, these problems can threaten the very existence of the venture. In such circumstances, the management and employees of the venture focus on surviving the immediate crisis and the long-term vision and strategy of the firm are soon forgotten. If this continues for long, the danger is that long-term plans are discarded as impractical or irrelevant. Ultimately, the firm acquires a shape very different from what was originally envisaged by the entrepreneur.