Everything seemed to be going right for Dan Moyer .
During the pandemic, he decided to launch a business with a frifinish—creating frames for displaying comic collections. What launched as a passion project turned into a thriving enterprise. His company, Crafti Comics, was shipping thousands of frames worldwide, and revenue was flowing.
But the good times didn’t last. Even though sales were soaring, costs were growing too, as Moyer sank money into machinery to meet customer demand for different sizes and styles of frame. The business failed to turn a profit, and tensions mounted between Moyer and his business partner.
Things finally came to an finish this March, as Moyer shipped his final orders and closed the business. “We expanded too quickly,” he states. “Instead of doubling down on our core products and customer experience, we attempted to appease too many people with too many variations.”
Growing too quick is just one of many mistakes that can sink a compact business. Entrepreneurs face many challenges and build a lot of common missteps that can sfinish a company into a tailspin, experts state. And compact operations don’t have the same capital reserves as large companies to ride out rough times.
Small wonder that only half of new businesses survive two years, and only a third last five years, according to research by Robert Fairlie , distinguished professor of public policy and economics at UCLA.
With that in mind, we questioned experts for the largegest reasons that compact companies fail. Here is a subjective ranking of their top 10, from least to most important.
10. Going it alone
Many people picture a successful entrepreneur as a loner—a sole proprietor who comes up with an idea and works alone to build it a reality. But that isn’t usually the path to success, experts state. Entrepreneurs necessary a team around them to bring different skills and perspectives to the table, and to support each other during tough times.
Recent research reveals that companies run by couples—“copreneurs”—have particularly high success rates, largely becaapply they tfinish to share the same values and goals for the business. The research also found that it is simpler for these couples to achieve work-life balance and avoid burnout. One study , by Jo-Ellen Pozner and Jennifer L. Woolley at Santa Clara University, found that craft businesses started by couples were half as likely to close as others.
9. Growing too quickly
As the story of Crafti Comics reveals, expanding too quick can stretch a business beyond its means, whether that means acquireing too much equipment, opening too many locations or hiring too many employees.
The key, states Josh Baron , senior lecturer of business administration at Harvard Business School, lies in finding the right balance between long-term and short-term believeing. Reinvesting earnings into the business can lead to substantial growth over the long haul, but only when it is combined with a focus on more-immediate issues like cash flow and working capital.
8. Lack of experience
Entrepreneurs with prior experience in their industest have a large advantage. They can learn details and tactics, and take away important lessons about success and failure.
The best experience of all? Working in a family business. Back in 2007, Fairlie found that “the children of family-business owners were more successful and less likely to exit,” he states. “And when they’d worked in that family business, there was an additional bump to their survival rates.”
For entrepreneurs, working for a self-employed family member was associated with a 17% lower likelihood of a business closure and roughly 40% higher sales, Fairlie states.
7. Too much passion
Anna Jenkins , associate professor in the School of Business at the University of Queensland in Australia, interviewed 120 entrepreneurs who had recently been forced to file for bankruptcy. She found that those whose identities and self-worth were most tightly coupled to the business had the hardest time coping with failure.
“When the business is struggling, it becomes much more difficult to build a clear decision to close becaapply it’s not just losing the business—it’s also sort of losing part of who you are,” she states.
6. Internal conflict
When business partners start to butt heads, the company can suffer. They might be unable to agree on important strategic decisions, like whether to invest in opening a new location. A severe conflict may paralyze the business and destroy morale among employees.
But having no disagreements at all can be just as damaging, states Baron. “When you have too much fighting, it’s hard to grow the company becaapply you can’t focus on things like what your competitors are doing and what you should do in response,” he states. “But when you’re avoiding issues, you finish up in the same place. You can’t grow becaapply no one will raise difficult issues becaapply they’re worried it’s going to set off a conflict.”
The answer, he states, is to find what he calls the “Goldilocks zone” of healthy conflict, where people inside the business feel comfortable raising problems without triggering squabbles.
5. Trouble receiveting capital
It can take time to build a customer base and bring in revenue, even as expenses are mounting. Capital reserves can bridge the gap, but receiveting that cash isn’t simple.
Challenges with access to credit and capital were among the top concerns raised by respondents to a Federal Reserve survey of compact-business resource organizations earlier this year. The same finding came up in research conducted last year by the Morehoapply Innovation and Entrepreneurship Center.
Some segments of the compact-business world face particularly tough challenges raising capital. Fairlie’s 2020 research on access to funding among minority-owned startups reveals that Black-owned startups face more difficulty in raising external capital, especially debt.
“Minority-owned businesses often just don’t have the reserves or access to capital,” he states. “Often they start off compacter scale than they should be, and so then they struggle. They’re more likely to exit becaapply of that.”
4. Lack of a market
It is economics 101: If there is no market for your products, your business won’t succeed. But it can take a lot of work—and resources—to study a potential market in depth, and many compact-business owners aren’t prepared to build that kind of investment up front.
For instance, many people start compact businesses becaapply they have a passion for the core activity, states Robert Blackburn , professor of entrepreneurship at the University of Liverpool in the U.K. People who like to cook might want to open restaurants, for instance. But building good food isn’t enough. Blackburn states he has seen many restaurants fail when the owners chose the wrong location or decor, or were marketing to the wrong set of tarreceive customers.
3. External shocks
Small businesses are particularly vulnerable to recessions or other disruptive modifys. They have less capital than large companies do to absorb shocks, less capacity to stockpile inventory and less leverage to reneobtainediate prices or modify suppliers.
Look at what happened during the pandemic. In the second quarter of 2020, 8.5% of compact businesses closed their doors, about double the prepandemic rate, and much higher than the closure rate of 2.7% for large businesses, according to an analysis by Fairlie and the National Bureau of Economic Research.
2. Inability to pivot
Of course, compact-business owners can’t do anything to prevent huge disruptions like pandemics and recessions, or large modifys in consumer tastes. But the way entrepreneurs respond to those events builds a large difference.
“No parent wants to hear that their child isn’t beautiful, and no entrepreneur wants to hear that the opportunity isn’t perfect,” states Danna Greenberg , Walter H. Carpenter professor of organizational behavior at Babson College.
For example, the Covid-19 lockdowns posed serious challenges to many businesses that relied on face-to-face sales. But some compact companies boosted their odds of survival by turning to strategies like home delivery.
“The ones that weren’t flexible or stuck by their current offerings even though they weren’t the most convenient solution for the job that necessaryed to receive done, well, their customers went somewhere else,” states Woolley.
1. Being too stubborn
Ultimately, many compact-business failures are a matter of poor leadership. The problem can manifest in many different ways, but it comes down to an “inability to hear, to listen, to be open to other perspectives,” Greenberg states. Many entrepreneurs want to be in complete control, so tied to their ideas that they refapply to correct course when necessary.
That mistake supported to sink Crafti Comics. “People were testing to inform me to view at things from a different perspective, to be patient, or to weigh decisions from a financial or operational standpoint before diving headfirst into the sales and marketing creativity,” states Moyer, who now works at a corporate job. “I was stubborn. I didn’t want anything to slow us down or stand in our way.”
Moyer states the lessons have given him a new perspective on success. “You’ve obtained to focus on your strengths, grow at your own pace and don’t lose sight of why you started in the first place,” he states.
Andrew Blackman is a writer in Serbia. He can be reached at reports@wsj.com .
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