The UK has a record 5.2m private sector businesses, up by more than half since 2000. “This is the golden age for small firms,” said Lord Young, the prime minister’s enterprise adviser, in a report earlier this year.
While many see a high start-up rate as evidence of entrepreneurial vigour, it is not the whole story. More than half of new businesses cease to trade within five years and, more importantly, the UK has a relatively poor record in building them into bigger companies.
“Enterprise is not just about the number of start-ups,” says the UK Treasury’s productivity plan. “In fact, most new businesses are no more productive than existing businesses, even after five years. Raising the productivity of the whole economy depends on facilitating the growth of new and existing businesses with the greatest potential.”
Since 2000, 90 per cent of the extra businesses have been self-employed, sole traders and other non-employing businesses. The proportion of start-ups that fail to survive beyond five years has crept up to almost 59 per cent since the recession, according to the Office for National Statistics, though one- and two-year survival rates are improving.
Among employer enterprises — those with at least one employee — half disappear within three years and 90 per cent after 10 years, says Professor Mark Hart, deputy director of the Enterprise Research Centre, a consortium of five university business schools.
But he adds, however: “I don’t think we should get terribly excited by failure rates as a headline. I think that’s just the natural churn that we see in the private sector.”
More important, he thinks, is encouraging the small proportion of businesses with growth prospects, perhaps 200,000, to reach their potential: “We have got a huge volume of micro enterprises coming into the market place, but we just can’t grow them.”
Among the OECD group of developed nations, the UK has one of the lowest rates of start-ups with between one and nine employees that grow to 10 or more within three years.
Not all of those that cease to trade are failures: some owners close businesses in order to take a job or retire, or sell them to other entities. Failure can be part of a Darwinian process whereby those who cannot succeed make room for those that can.
Every individual failure is painful, though. Emma Jones, founder of small business network Enterprise Nation, says the most common causes she sees are overspending and failure to achieve enough sales, typically through lack of knowledge of the market, or failure to seek early advice.
“When people start a business, they think they should take an office and hire people and buy the best equipment,” she says. “You shouldn’t do any of those things. You should start from home, do everything you can first of all and then outsource to freelancers, so that you can manage the budget. Beg, borrow and barter when it comes to expensive kit.”
A founder whose strength is in devising products, she says, may need advice on financial management or sales and marketing. “Those that access small business networks — go on to blogs, go to events and meet other entrepreneurs — tend to grow at a quicker rate.”
Proportion of new businesses that do not employ staff
Ms Jones, who co-founded StartUp Britain, the campaign to encourage entrepreneurs, is optimistic that more new businesses will go on to create employment as their confidence grows.
Research by CB Insights among founders of 101 failed start-ups in the US found that the number one reason for failure, cited by 42 per cent, was lack of a market need for their product. After that came: ran out of cash (29 per cent); not the right team (23 per cent); got outcompeted (19 per cent); pricing/cost issues (18 per cent); poor product (17 per cent); lack of business model (17 per cent); poor marketing (14 per cent); and ignoring customers (14 per cent).
Percentage of start-ups that fail to survive beyond five years
David Mellor, a business mentor and honorary senior visiting fellow at Cass Business School, says that often “they come up with a solution that has to go and find a problem, because they haven’t done enough research”.
Failure to appreciate what they are getting into, particularly among people who have left larger institutions, is a problem, Mr Mellor says.
A second is bad debt, because founders tend to be naive about getting paid on time.
When Mr Mellor set up his consultancy in 2001, after leaving Deutsche Bank, “it was eight months before I got my first cheque and my first client turned into a bad debt”. Now he outsources invoicing to a specialist.
A third common source of failure, he adds, is choosing the wrong partner or hiring the wrong staff.
Ask business owners about barriers to growth and they often cite external factors such as a scarcity of skilled staff, or red tape and tax, but one big problem lies closer to home: a lack of leadership and entrepreneurial skills.
“We have an issue over the capability of owners to grow the business and take it on to the next step,” says Prof Hart.