Do start-ups increase in proportion to the availability of venture capital? Nope.  Kaufman Foundation researchers Dane Stangler and Paul Kedrosky dispel that myth as well.  The authors note that the doubling of start-ups from the period 1960-1978 to the decades since may indeed have been due to the advent of the personal computer and the expansion of the venture capital sector.  (One wonders if the baby-boomers coming of age may not have contributed to this step-change as well.) However, the constancy of recent start-up data belies the influence of venture funding.  Start-up activity fluctuated by only 3% to 6% each year between 1977 and 2005; but the data shows that venture investment varied by as much as 500% during the same period.

Do tax or bankruptcy law changes, technological advances or entrepreneurship education affect the number of new ventures? No again!  The report, Exploring Firm Formation: Why is the Number of New Firms Constant? also finds no correlation between start-up activity and tax policy or any of these other factors; so much for the theories of our most vocal politicians.  Instead it documents the same steady half-million start-ups per year, give or take a 3 to6 percent.  The authors discuss a few possible explanations for the unexpected constancy, some rather arcane, but they do not seem to buy into any of them.

Common sense suggests that certain of the factors discussed in the Kaufman report must have at least some influence on the number of start-ups, even if they do not affect substantially the total for a given year.  For example, limited amounts of available venture investment must surely delay some particular start-up decisions.  I have been involved in a few such decisions.  Similarly, high interest rates and tight credit must also have an effect on many decisions, especially those involving sole proprietorships and mom-and-pop operations.  So perhaps a study with greater granularity would reveal that while the total number remains relatively constant, the mix of start-up types changes, maybe even substantially.  Perhaps in recessions when venture funding declines, a fall in interest rates turns entrepreneurs toward credit sources.  It could also be that more innovation-based entrepreneurs test their business innovations when the economy is booming, and that more laid-off workers start enterprises when unemployment is high during recessions.  I suspect that the “mix” of different kinds of start-ups changes a great deal even though the total number may not change much.

The Stangler and Kedrosky study does not encompass the current Great Recession, of course, it is too soon.  Yet surely this anomalous economic epoch will surely add some telling figures.  The investment portfolios of the wealthy individuals and institutions that comprise the limited partners of venture firms declined substantially since 2007 and venture investment has fallen by 40% or so since then.  At the same time, credit tightened historically and unemployment soared into double figures.  Will start-up totals for this period continue the constancy that Kaufman reports?  And if not, how will it vary?  Will the limitations on available capital drive start-up numbers down, or will necessity and cheap assets power them up?  Or will past constancy persist despite alterations in the mix?  Only a study based on more granular data could reveal that.  I doubt that such data is available or could be economically derived, though that information could prove useful to an economy so reliant on small businesses to create jobs.

UWR42W67XZZM

<!– Start Who Links To Me Code c66b3add7f7055b589026873b8d6bda9 –>
<a href=”http://wholinkstome.com/url/writebizplan.com”><img src=”http://wholinkstome.com/images/wltm_1.png” border=”0″></a>

Nearly every professional manager knows that planning is crucial to business success.  Still, few people actually act on that knowledge.  In over 15 years of helping businesses plan their growth, it has become increasingly clear that only a small percentage of managers draft formal plans in order to create a disciplined strategic road map for success.  Instead, the motive that drives the production of most business plans is the need to raise capital, either bank loans or equity funding.  Everyone has heard some version of the old adage that “Failure to plan is a plan for failure” but few realize the actual consequences of deciding to “get by” without a carefully thought through, written business plan. The statistical evidence of that folly is overwhelming.

The Top Ten Reasons That Businesses Fail

No, this is not one of those David Lederman jokes; unfortunately it is deadly serious.  The business statistics surrounding business failure are widely published.  A Dunn and Bradstreet research report cites managerial incompetence as the cause of 96% of American business failures.  Many Internet sources have their own “Top 10″ reasons for business failure in the U.S. and although they differ somewhat in detail, the vast majority of relate directly to inadequate planning.[1] Here is the Small Business Administration’s rather typical Top 10 list:

1.  78% lack a rigorously-developed business plan keyed to the realities of their market, including sufficient research on the business before launching it.

2.  73% fail because the owner is wildly optimistic about projected sales, break-even point, and capital required.

3.  70% fail because the optimistic owner believes he/she can wing it on important issues with which he/she is ignorant, and ” can’t afford ” to hire the expertise to get it done right the first time.

4.  63% of new business owners simply don’t have the required business experience to make a success of the enterprise.

5.  82% lack cash-flow management skills. They don’t understand the importance of controlling cash flow.

6.  79% launch with a bright idea and little or no capital.

7.  77% don’t have a rationally-developed pricing model for their products or services.

8.  64% don’t have a clue as to how to aggressively promote their business, nor do they understand its importance.

9.  55% don’t understand their competition, or assume it can be safely ignored.

10.  47% rely too much on one customer/client.

Clearly, a rigorous project to write a comprehensive business would reveal most if not all of these top 10 problems in advance.  Especially if the project involved actively seeking criticism of the plan from experienced business people, investors, managers, academics and mentoring organizations such as SCORE and the Small Business Administration.

Don’t Bother Me with Facts

Few operating businesses write plans despite all the accumulated evidence that a written business plan – built on sound market and competitive research and including operational and financial plans – is crucial to business success.  Temple Porter once remarked to me that people only take business planning seriously when business pain forces them to do so.  Foresight simply does not motivate the vast majority of managers.

Mostly at the early stages of business development when businesses need capital and MUST write a business plan to attract investment, or when they require additional financing in later stages, will they grudgingly write one.  Generally, even in those situations entrepreneurs and managers sell their businesses short by producing a document designed more to “sell” outside investors on their idea than to actually plan for their own future success.  They seem to forget that the founders and owners are the people most invested in the business.  Outside investors stand to lose only some discretionary capital: Owners and founders risk years of work, dreams, foregone opportunities, the cost of loans they personally guaranteed, perhaps their business credibility and certainly their jobs.

Every management team can recite a laundry list of plausible sounding reasons not to write a business plan for use a road map for growth.  “Time, resources and money” they will explain, “are better spent on running the business.”  Another familiar favorite is “We have a business plan but it’s not written down.” Yet no one can keep all the details of a real business plan in their head all at once.  So yes, even though 78% of businesses fail due to a “lack a rigorously-developed business plan keyed to the realities of their market” they all have plenty of reasons.  Only the other 22% have decent odds of survival, to say nothing of achieving prosperity.

Business Planning Best Practices

Every business needs to review its business plan annually.  That does not mean that they must right a new one every year, of course; in most cases that would overstate the need.  If a business has a written plan less than three years old, the executive team should review and discuss each strategy in light of the changing market place, available resources and external trends such as those in technology, regulation or demographics.  Management must place special emphasis on updating their competitive analysis and marketing strategies at least every year.  Still, operational plans and financial strategies warrant annual re-evaluation too.  Rather than write a full new plan, management can write an update and add it to the plan.  Update should include new factual findings, the reasons for making changes and specific new strategies and tactics.  When reviewed and approved by appropriate stakeholders, managers should communicate the plan, its central strategies and especially reasons for changes to the company’s employees.  When everyone knows and understands the overall plan, it is much easier to make individual day to day decisions and obtain “buy-in” and the sense of teamwork and shared mission that goes with it.

If your company or start-up venture does not have a business plan, write one immediately.  Spend the time to do it right and completely, with a full analysis of your business model, product or service, target market, value proposition, industry, competitors and financial plan.  If you decide to fly blind instead, in all likelihood you will eventually crash.  Look really hard at those statistics above.