Work

Start-ups: Ignore the figures at your peril

Researchers say entrepreneurs often overlook early warning signs of failure as they cling to common myths about starting a business

Two of the biggest mistakes entrepreneurs make is having a solution in search of a problem instead of the other way around and ignoring financial red flags. Photograph: iStock

Olive Keogh's face
Olive Keogh
Thu Apr 4 2024 - 10:00

Apart from a nice chunky win on the Lotto, starting a business and getting away from an annoying boss ranks high on many people’s dream lists. Hundreds of would-be entrepreneurs take the plunge every year but the majority (90 per cent) fail. However, in a triumph of optimism over experience, people keep trying because they’re sure their idea will be the one that hits the jackpot.

Buying a ticket to self-determination has its attractions. Hours worked and rewards reaped are yours with no corporate overlord creaming off the fruits of your labour. And while the start-up process may be a steep learning curve full of glitches and long days, it’s also hugely exciting and free-flowing adrenaline does a good job of propping people up when pit stops for food and sleep are in short supply.

Turning an idea into a tangible business is a potent driving force but it’s also a potential Achilles’ heel if the drive becomes all consuming. It can be easy to lose the clear line of sight and two of the biggest mistakes wannabe entrepreneurs make is having a solution in search of a problem instead of the other way around and ignoring financial red flags.

[ Enterprise Ireland blames bureaucracy for losing out on new staff ]

Surprising as it may seem, entrepreneurs can be very good at brushing money issues aside and focusing their attention elsewhere within the business.

READ MORE

New research from Emlyon and ESC Clermont business schools in France shows that entrepreneurs are often so blinded by their dreams that they believe a strong fighting spirit will be enough to get them out of most difficult situations. But the researchers say that common myths about starting a business, such as not making a profit early on, poor financial results and enduring personal hardship, mean entrepreneurs often ignore the early warning signs of failure.

Their findings are based on an eight-month study of entrepreneurs in a business incubator during which the researchers sat in on their financial forecasting meetings in order to assess their reactions to the figures and find out what actions they took on foot of what they’d heard. Financial problems clearly raised anxiety levels among the entrepreneurs yet, more often than not. they continued to plough ahead even though the chances of turning things around were slim.

Successful entrepreneurs love to tell stories about their gladiator-like struggles early on and there are plenty of colourful tales about Silicon Valley start-ups where the promoters launched businesses from dorm rooms (Facebook) or slept in their offices and showered at the YMCA as Elon Musk did when he was starting Zip 2. However, colourful anecdotes are not the same as the black-and-white stories told by the money.

[ Local Enterprise Offices supported highest ever number of jobs last year ]

“Financial reporting gives a good insight into the performance of a company and should not be ignored,” says François-Regis Puyou, professor of accounting and corporate finance at Emlyon business school. “Entrepreneurs should not let hope or spirit cloud their judgment when it comes to performance and forecasts.”

Prof Puyou adds that entrepreneurs typically use similar tactics to overcome disappointing performance – such as redoubling their efforts, willingly forgoing a salary and boosting sales forecasts even though they often rely on as-yet-unproven new services or products for this.

Entrepreneurs may think that juggling is par for the course, and to some extent it is, but Prof Puyou says overly optimistic assessments and failing to stop and take the time to join the dots between poor performance and failure only delays the demise of a business.

Prof Puyou urges entrepreneurs to be more objective when it comes to money. “It is important for them to stay as level-headed as possible and not to continue to pursue something that is clearly likely to fail,” he says.

One way he suggests of keeping things on an even keel is to ensure that, where there’s a team of people supporting an entrepreneur, its make-up should be as diverse as possible with a good mix of both assenting and opposing viewpoints.

[ Cork waste-to-energy start-up raises €900,000 in seed funding ]

Burning through cash is one of the fastest ways for a start-up to get into trouble and while the eternal optimists will bank on the universe to provide, the reality is that raising money to keep things on track is hard work. For a start, it takes more time than most start-ups allow for in their forecasts and, depending on the sector, it can take longer still as investor tastes can be fickle.

For example, the latest report on fintech financing from KPMG shows that investment in the sector worldwide plunged last year, with investment in Irish fintechs down a whopping 94 per cent year on 2022. Investors put a little over €56 million into fintech companies here last year and that was concentrated in just 11 deals. In quarter four there were no deals, the first time this has happened since 2012.

The sectors that seem to be piquing investor interest at the moment are AI, life sciences, cybersecurity and new energy technologies.

“Many start-up founders get caught up in the excitement of building something new,” says Simon Factor, head of new ventures and investments at NovaUCD, “However, neglecting cash flow is like driving a car without a fuel gauge. You might have a great destination in mind but you could run out of fuel at any moment. Carefully monitoring cash flow ensures you have the resources to keep the engine running to reach your entrepreneurial goals and will build confidence among investors, staff and suppliers.”

NovaUCDKPMGElon MuskFacebook