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New ventures seem to suffer more difficulties and business failures than do established firms. Also, there is a pattern to the mortality, with most newly founded businesses lasting only a few years. Explanations of high failure rates in new ventures have often centered on “poor management,” or have postulated that firms chose inappropriate strategies for their markets and economic environments. The present article conceives of new venture mortality as similar in nature to patterns of development that we observe, for instance, in human embryos or in the formation of new species. That is, development is an inherently hazardous process. Some of the specific hazards of development are: 1. 1. Generic Entry Barriers . It is generally not possible for a new firm or product to successfully enter an already crowded, stable market where competitors are strong. It is more feasible instead to enter a new or growing market; or to enter with a “substitute” product that is clearly superior to those existing; or to exploit an unnoticed market opening; or to develop competitive strengths “secretly,” without overtly challenging others in the industry. 2. 2. Density of Developmental Hurdles . Any new entity must clear a sequence of important hurdles on its way to maturity, such as establishing a well-ordered office, a functional sales channel, etc. Failure at any one hurdle is potentially fatal, and a mathematical analysis shows that the likelihood of passing even 10 hurdles in a row is about one in three. The earliest hurdles tend to be the most difficult and to crowd more densely than later hurdles. Particularly troublesome are “phase changes” where a company first starts business or becomes one thing rather than another within a short period of time. 3. 3. Amplification of Maturational Error . Any complex system that grows rapidly and is unable to predict the future perfectly is going to accumulate structural errors that become very difficult to remedy. This is a natural and inevitable developmental process, as the system grows in complexity and the flaw itself becomes a pillar of the system. If an imitator or competitor arrives soon afterward and spots the error, he or she will easily be able to retool and redesign a better system, whereas the first firm is stuck with old habits, tools, dies, and production methods. 4. 4. Sequence and Control in Development . Every embryonic organism has a design template outlined in its DNA that is carefully followed. Both the developing fetus itself and the mother have monitoring and control mechanisms that trigger an abortion if the development process goes awry. New ventures lack such mechanisms. They are more susceptible to “developmental deviance,” likely to differ from the model successful corporation of their type. 5. 5. Smallness and the Asymmetry of Luck . Small things are more subject to the whims of fate than big things. Amount of resources is the key. Because new ventures typically start off with scarce resources, a bad bounce can sink the company, and the probability of at least one such bad bounce is high. 6. 6. Costs of Organizing . Like all of the larger-brained mammals, a new company, such as a medical supply firm, must learn through experience much of what it means to be mature. Costs associated with learning arrive just when the firm is most vulnerable and distracted by other challenges. In one sense, the message of this article is good news, in that managers of failed enterprises need not assume all the blame. After all, if most new businesses do poorly, then failure is the average or typical case, and it makes little sense to say that the average manager is “poor.” The bad news is that, if our perspective is correct, managers of new ventures have less scope to influence the success of their enterprises than is commonly believed. The managerial recommendations that emerge are that new ventures are more likely to succeed to the extent that they: have sponsorship or capital, have managers with a range of experience in previous ventures, are given extra assistance of “shelter,” or can ensure a high probability of passing all of the hurdles faced by a new venture. |
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