Consulting startups fare far worse than any other professional entrepreneurship, according to the US Bureau of Labour Statistics, with around 80% of new consulting companies folding within their first two years of operation.
But consulting does not by any means have a monopoly over failure.
More Small Business Fail Than Succeed
A Statistic Brain study showed that more than half of all US businesses closed down within five years, and more than 70% after 10 years.
A similar statistic applies pretty much universally, with a global study by Small Business Trends showing that just 56 percent of small business startups make it into their fifth year.
The study also shows that only 40% of small business startups go on to make a profit, 30% break even, and 30% make continual losses.
Knowing why so many startups fail will give a better understanding of what it takes to succeed.
Top Reasons for Startup Failures
Let us examine what lies behind the sobering statistics outlined above as they apply to entrepreneurship in general, including consulting. Later in this article, we will try to identify factors that make consulting a particularly risky business.
1) Little or no Market Demand
Making a product or offering a service for which there is little or no market demand has been identified as the leading reason small businesses fail.
In today’s world of cut-throat competition, the product or service most likely to succeed is the must-have one rather than one that’s nice to have.
It is quite usual for a startup to bring to the market a product or service that fails to meet the market need. It then may take one or two revisions to meet the target. In the worst cases, when the team failed to do proper research, a total rethink is needed.
2) Running out of Cash
All entrepreneurs face the same problem—how best to spend the money raised either through financial institutions, funding schemes or from sales of services and/or products.
The key challenge for the CEO is to understand how much cash is needed to carry the company to a milestone that will ensure positive cash flow. And then to manage the finances to ensure that the milestone is reached.
Good cash-flow management entails tracking every inflow and outflow in order to be able to delay outlays for as long as possible while trying to speed up inflows by getting debtors to pay up promptly.
3) Weak Management Team
This problem is more common than could be expected and usually stems from the fact that business partnerships are often based on friendships and common ideologies, rather than on experience and hard-nosed economic principles.
Weak management teams are known to make mistakes in the following areas:
- Research: They fail to investigate market trends thoroughly, which can result in the company investing in products or services no-one wants to buy.
- Execution: They are poor in execution, which results in the product or service not being developed properly or on time.
- Marketing: They may have come up with a potentially winnable product or service but, having had no marketing experience, they don’t know how to turn it into a ‘must-have’ commodity.
- Teamwork: Being weak, they will build weak teams under themselves.
The most successful startups are those which include experience, drive, and vision in the team from the outset.
4) Being Outcompeted
As soon as the market validates an idea, you can be sure many entrants will start crowding into the space. Ignore the competition at your peril.
The only way to rise above the mob is to be noticed —and to be noticed online at that.
Here are some tips to get your startup noticed online:
- Use social media to your advantage by adding quirky details about your business, links to interesting articles, and some fun anecdotes about your office.
- Don’t neglect Instagram. While Facebook and Twitter are popular social media platforms for most companies, Instagram is often ignored. But, with more than 300 million users, it is a veritable economic powerhouse.
Why Consulting Startups are Riskier Than Others
Consulting firms are more vulnerable than most other enterprises to shakiness in their foundations.
Some of the unique problems faced by startup consulting businesses include the following:
This is a problem that afflicts small to mid-tier firms in particular. They become too specialised in certain core areas of consultancy. Should these core areas stop being viable, they start to implode.
2) Too Much Reliance on Too Few Clients
For smaller firms, often a few clients will bring in most of the revenue. Losing these clients could sink the business.
A study by Forbes indicated that only about half of consulting clients would, after the successful completion of a project, use the same firm again. This factor indicates the extent of the challenge consulting firms have in building effective client relationships.
3) Lack of Marketing Skills
While many professionals may be excellent consultants, their marketing skills are weak or non-existent. Unless they can find a way to market their skills, their new businesses will never get off the ground.
“You’re not in the consulting business, you’re in the marketing business,” says Alan Weiss in his book ‘Million Dollar Marketing’.
The lesson from this: make sure you have a person skilled in marketing on your team.
4) Over-reliance on Time-based Models
For smaller consultancies and freelancers, time-based fee models can sound the death knell for the company.
The surest way to survive the early years is to find other fee models, such as fixed sum, subscription, or value-based. The time-based transaction method is a sure-fire failure model for the smaller consultancy.
5) The Floundering Syndrome
Many consultancies find it hard to adapt to changes in the marketplace. They overspend on overheads and non-revenue generating expenses, and they chop and change their core business goals trying to keep up with the pack.
We call this the Floundering Syndrome
To turn ‘floundering’ into ‘flourishing’ you need to execute some specific changes in focus, including:
- Proper long-term planning
- Slow evolution rather than a speedy revolution of the company
- Taking time to get to know potential clients
- Targeted advertising
Venture Forth – and Never Fear the Statistics!
If you put your trust in statistics, you might feel that the odds of success as a new independent consultant are not obviously in your favour—but I urge you not to be put off from launching your consulting startup, or from starting out again if your first venture failed.
Avoid the mistakes outlined in this article, and you’ll greatly increase your chances to build a thriving small business.
After all, the statistics also show that you have an 18% chance of success if you are a first-time entrepreneur and a 20% chance if you are tackling a new venture after your first one failed. If you succeeded in your first venture, you have a 30% chance of making a go of another one.
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