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 Businesses 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.

The Small Business Trends study shows that 82% of small businesses that fail do so due to cash flow problems.

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:

1) Inability to Network  

Since consulting is, in essence, a relationship business, it is crucial to create a wide and effective network of professional relationships. The most significant way you can grow your consultancy is to devote time and energy to cultivating professional relationships. Consultants, in general, are fully cognisant of this basic rule but many find it difficult to put it into practice.

You have no doubt posted your profile on LinkedIn, but how much have you used it to expand your network? The best way to do this is to send connection invitations to everyone you have at one time or another had professional dealings with, including clients, vendors, and colleagues.

Do the same with everyone whose business cards you have collected over the years, as well as those on your emailing lists, and those you are connected to via your social media accounts.

You will find that the effectiveness of your network expands exponentially with every new person you reach.

2) Over-specialisation

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.

3) 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.  On the other hand, taking on too many clients, especially those with limited spending potential, is a certain recipe for stress and burnout. Many startups fail to get the balance right and find themselves either out of pocket or severely overstretched.

4) 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.

5) 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.

6) 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.

Let us 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

7) Lack of Expertise

The 2008 financial crisis, which resulted in widespread job losses, spawned a new crop of independent consultants. The Covid-19 pandemic, which has crashed global economies on a much larger scale, is expected to intensify this trend.

The problem is that many of these startups are headed by people who lack experience and expertise and who are essentially subject matter experts rather than true consultants.

These entrepreneurs quickly run into trouble for some or all of the following reasons:

  • They lack broad knowledge of the industry
  • They think and act like employees
  • They lack effective tools and techniques 
  • They are unable to communicate skilfully
  • They are more project-focused than client-focused
  • They don’t develop a distinguishable brand.

8) Inability to Retain Clients

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.

Two of the main reasons given by company executives for their dissatisfaction with the consulting firms they had hired were:

1. The consultants failed to articulate an accurate definition of the project.

2. The firms did not provide strategic direction on how to manage the project.

The study found that many executives believe consulting firms are not involved enough in the execution of a project and don’t communicate sufficiently with internal teams and management.

In the cut-throat business environment spawned by the global financial crisis and made more desperate by the COVID-19 pandemic, a poor review by executives of a consultancy’s performance could very likely be the kiss of death. 

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.

Editor’s Note: This post was originally published in March 2020. It has since been updated and expanded, to make the content more informative and comprehensive.

Best Regards,
Rob O’Byrne
Email or +61 417 417 307