Why Most Businesses Fail (A Theoretical Model) | Hacker News Reader

Why Most Businesses Fail (A Theoretical Model)

marktaw.com

20 pointsacangiano6 comments

"Don't allow yourself to get desperate. Studies about how people make decisions when under pressure show that you lose flexibility when there's a deadline looming. You try the first thing that comes to mind, and unless you're an expert, it's frequently the wrong thing (and even when you're an expert it's frequently the wrong thing). (Klein, 1998)"

This rings true, but where could I read more online about these studies?

For those interested, the paper (at least I think): Klein, Gary. Naturalistic Decision Making. Human Factors: The Journal of the Human Factors and Ergonomics Society 50, no. 3 (June 1, 2008): 456-460. http://hfs.sagepub.com/cgi/content/abstract/50/3/456. PDF: http://hfs.sagepub.com/cgi/reprint/50/3/456.pdf

I find it hard to accept that the majority of small businesses last that long without making an operating profit, 8 years of continuous loss? What bank would accept this?

I'm referring to retail banking which is the norm outside the atypical tech start ups sector of all new entrant small businesses.

I'm assuming that a good chunk of all new businesses started are restaurants, corner stores, dentists & hair dressers etc. Surely it can't possibly be that these guys have to tough out a curve like this/face such a failure rate, which begs the question; if hairdressers can run a small business reliably then why can't a tech company aim to produce value right from the start?

Many businesses aren't funded by banks. They're bootstrapped the entire way. It's not uncommon for a business to lose money for the first few years, it's actually the norm. According to the US SBA, 50% of new businesses fail in the first 5 years.

That's a misleading statistic because the IRS only allows you claim deductions on a money-losing primary income generator for the first five years.

After that, it's reclassified as a hobby, and you can't deduct for it any more, so businesses either suddenly start submitting tax returns that show they're breaking even or profitable, or they stop submitting them altogether (have "closed" or "failed").

His article is pretty dark and I can not fully share the theoretical models. Clearly he wants to use a simple model for a visual representation and that is fine for the purpose. But the assumption of a fixed 4% increase in revenue is to simplistic for me. Either the product has some traction and success than the percentage numbers will be far higher, which totally changes the graphs dynamics or it does not generate sales. Than the product should be rather sooner than later changed or axed.  There are many other reasons why business are not successful short term or long term, than just revenue/expenses.

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