I have been traveling this week, so this is an abbreviated Monday Morning Message (MMM) post. My last MMM was about the facts we gather and interpret to understand the state of our businesses, and how often we get it wrong. As I was writing it, I thought about the macro statistics regarding business failures and success rates. I discovered that only 5% of businesses reach $1 million or more in revenue. Only 0.4% of companies reach the $10 million revenue mark. This means that out of approximately 28 million companies, roughly 112,000 ever achieve this level of revenue. Approximately 90% of startups fail, and according to the Bureau of Labor, 20% do not make it past their first year. If we focus on venture-backed companies, according to Shikhar Ghosh of Harvard Business School, 75% of this cohort fail to return cash to investors, and in 30-40% of the cases, investors lose their initial investment (based on a dataset of 2000 venture-backed startups).
The bottom line is that it is tough out there for an entrepreneur to launch a successful business. According to Startup Genome, the primary reasons for failure often relate to execution rather than the business idea itself. Which brings me back to the data problem I highlighted in my last post. We get so much data in corporate reporting, and yet we are so often surprised by the business outcomes. If we start with a solid business idea, and we are able to attract smart venture capital, then the failures must primarily be due to factors like poor leadership, misalignment of values, and ineffective processes.
These variables should be within our control, if we only had effective reporting that enabled boards of directors and leadership teams to recognize when things are going awry and take action to course correct. However, even when the reporting is flashing red, an overriding obstacle is leadership’s refusal to acknowledge the core facts. Instead, they focusing on the ‘feel good’ metrics that make them believe things are going well. CEO optimism gets in the way, and telltale indicators are explained away rather than highlighted. In sales, there is a saying ‘if you are explaining, you are losing,’ and the same is often the case for an entrepreneur trying to explain why a bad trend is actually a good thing, or at least an acceptable outcome. It is human nature that we resist admitting a mistake, and leadership teams and even boards of directors are reluctant to admit the need to change course or pivot until it is too late.
We often suffer from confirmation bias when we look at corporate performance. The CEO believes in the business, and is biased to see confirmation of their belief in the data. The investors created an original investment thesis, and are biased to confirm the wisdom of their investment. Finding the right core measures and applying thoughtful unbiased analysis is the key to keeping our eyes open and the company on a course to be a success rather than a contributor to the negative statistics about business failures.