September 13, 2009
Undercapitalization or Bad Strategy?
Many entrepreneurial writers cite the “fact” that most new businesses fail because of undercapitalization. This incorrectly leads to the recommendation that entrepreneurs must simply raise more and more money.
What is ignored in this equation is the answer to “why did the business run out of money?” The answer to this is the real reason for the business’s failure. It could be because there was no sales strategy or a malfunctioning marketing plan. It could be because competitors were really already serving the market need well and the founders were wearing rose-colored glasses when considering their chances at carving out market share. It could be because costs were 2x, 5x or 10x what was expected because of poor research and planning or a lack of a risk management strategy. These are the real reasons businesses fail. Stating that more capital could save these new businesses infers that money answers everything. If it buys more time to fix the real problem, maybe it would have helped. If more capital would have meant throwing good money after bad on the business, isn’t it better for our economy to know that businesses are failing when they run out of money (read – the confidence of investors, lenders, and shareholders in the business) rather than wasting more capital?
Let’s stop citing undercapitalization as a reason for business failure. It is too simplistic and tells us nothing about what led to the situation of undercapitalization. What we are really talking about is a poorly crafted strategy or insufficient planning and digging into this can provide real guidance for entrepreneurs.
Here are a few websites where “undercapitalization” is cited as a top reason for new business failure:
http://www.businessknowhow.com/startup/business-failure.htm – Reason Number 3 for business failure given as ‘insufficient capital”
http://www.associatedcontent.com/article/78826/a_look_at_why_most_new_businesses_fail_pg2_pg2.html?cat=3 – Reason number 5 here.
http://www.allbusiness.com/business-planning-structures/business-plans/1440-1.html - A number of the reasons given here are around the undercapitalization idea
http://www.evancarmichael.com/Starting-A-Business/866/12-REASONS-WHY-NEW-BUSINESSES-FAIL.html - Number 2 reason here.
