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Why are Australian start-ups failing?

In Australia, we seem to be pretty good at starting things. Why then, as one of the most innovative OECD countries, do almost 97 per cent of start-ups exit or fail to grow?

Australia ranks 8th out of 38 OECD countries when it comes to starting new businesses. Australian Bureau of Statistics data shows that almost all employment growth over the last decade can be attributed to start-up businesses - defined as a business less than two years old.

In addition, about 70 per cent of Australian start-ups report some type of innovation in product, process or market entry.

But, despite this flurry of innovation activity, very few of these start-ups create either permanent jobs or long term economic and social benefits. It has been estimated that almost 97 per cent of start-ups will either exit or fail to grow and, of the firms that do make it beyond their first two years, 77 per cent of all economic benefits will be created by the 3 per cent of start-ups that become high growth firms.

Additionally, Australia ranks last for start-up growth out of 27 OECD countries measured.

Almost all employment growth in Australia over the last 10 years is from start-up businesses. Picture: Pixabay

FOCUS AND PRIORITISE

Maybe part of the answer to creating high growth businesses lies in what just about any Australian visitor to Silicon Valley hears from the locals about Australian entrepreneurs – we lack focus. It is no coincidence that the great entrepreneurial clusters around the world share one common trait - they are outstanding at a few things, not everything.

One of my favourite Australian examples is Intrepid Travel. In many respects, Intrepid is a familiar story – two Aussie mates return from travelling the world, and decide to create a business that lets them keep on travelling. In Intrepid’s case, the founders Darrel and Manch, decided to focus on small group adventure travel that created economic, social and environmental benefits at the destinations they work with.

Their focus on a particular market also gave them insight to a travel trend that was emergent in 1988 but has become a key driver of travel choices today – conservation and sustainability. They incorporated this insight into their business model, as a core and driving value, ahead of many other travel businesses and they are now the largest travel company of their type in the world, hosting over 100,000 travellers a year.

Like the entrepreneurs at the helm of our start-up industry, investors and policy makers need to focus their efforts. Whether these priorities leverage current high growth areas like mining, specialised transport and special accommodation, or look to kick start new areas of innovation; what is clear is the need for a strategy focused on encouraging the right start-ups, not simply more start-ups.

It sounds like heresy in the current rush to throw public and private resources at encouraging more start-ups, but it may be possible that less is better.

FROM START-UP TO SCALE-UP

The failure of start-ups to grow isn’t a uniquely Australian problem. Many international reports have identified the same problem – entrepreneurs lack the skills to ‘scale up.’

Entrepreneurship can be thought about as two journeys. The first; the technological journey which is usually relatively predictable and stable. The second; the personal and business journey which is much more erratic and unpredictable.

It is important that we equip people for the technological journey, and the current national focus on encouraging more people to study STEMM (Science, Technology, Engineering, Mathematics and Medicine) topics makes sense, particularly the current emphasis on increasing participation from under-represented groups.

An entrepreneurial ecosystem only has value when it is used. Picture: Heisenberg Media/Flickr

It is not so evident that we are doing great job of preparing people for the business and personal journey.

We are seeing record numbers of business graduates from universities around the world, at the same time as higher numbers of entrepreneurs report failure to grow or even survive. A lack of marketing, finance and business management skills is frequently associated with start-up failure in Australia and overseas. It seems entrepreneurs either do not have the opportunity to acquire these skills for themselves or lack the networks and expertise to attract these vital skills to their business.

I’m not sure that a global campaign to encourage entrepreneurs to learn to read a profit and loss statement would capture the zeitgeist of rock star entrepreneurs telling us we need to learn to code, but it might be just as useful.

Rethinking the entrepreneurial ecosystem

Of course the personal and business journeys are not independent of one another, and many argue that the long tradition of mentorship can help to create a harmony between the two to underpin business success.

In principle, it seems promising to link inexperienced entrepreneurs with experienced advisers. However, it doesn’t always work in practice.

Recently, colleagues at Stanford and Berkeley separately described mentorship as the greatest wasted opportunity in entrepreneurship’. Their experience is that mentors and mentees tend to be poorly matched and the frequency and format of meetings tend to be ad hoc. This is clearly not a great model for the exchange of knowledge and information.

Anecdotal feedback in Australia indicates that lack of specific experience relevant to the new business venture, lack of direct experience in a start-up, unclear expectations of mentors and mentees and lack of clarity around progress from the mentor relationship are seen as fairly common problems.

Australia has a global reputation as a great place to start a business, but it is critical to our future that we become a nation that is famous for growing businesses. It appears that some of the elements are already there. We have an ever increasing number of people with the business skills to help entrepreneurs grow and a willing group of people with relevant business and personal experience to help entrepreneurs on the journey.

As the global rhetoric slowly shifts to the critical role of the ‘ecosystem’ for successful entrepreneurship, we are quickly putting some of the key elements of that ecosystem in place. But the part of the puzzle that still remains unsolved is the best way to connect inexperienced entrepreneurs with the part of the network that is most relevant and useful for them.

We frequently admonish innovators who take a ‘build it and they will come’ approach to new ventures, but that seems to be the approach we are taking to building an entrepreneurial ecosystem.

An entrepreneurial ecosystem doesn’t have value because it exists, it only has value when it is used. The very low number of high growth start-ups shows that we still have a lot to learn about making the emerging ecosystem useful.

Banner image: Pixabay

You can find more information on entrepreneurship at the University of Melbourne here.

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