QBLOG — Job creation in any economy is led by new enterprises, and hiring. Larger corporations tend to consolidate, often through acquisition and shedding employees.
In all countries the failure rate of startups is high. Embroker.com estimates 90% for the US. The good news is that those who have failed and try again have a much higher success rate.
In Costa Rica, new businesses, especially small shops, and eateries, open every week. Many close within a few months. The sad sight of shuttered premises, new equipment and fittings sold off at knockdown prices and staff being laid off could be avoided with a little more care.
Pitfalls to avoid
- Frequently, a plan shows monthly cash flows for when the business is up and running.
- The owners fail to allow for the time it takes to attract and build a customer base. The business plan might be used to secure finance. If there is no allowance for the build-up period, it may become impossible to meet the interest payments.
- Some naive entrepreneurs might confuse cash flows with profit. They spend the cash, leaving insufficient money to replace supplies, to pay rent or for wages and taxes.
- When faced with disappointing early results, some try raising prices. This attracts even fewer customers.
- Another common practice is to start reducing opening hours. Many restaurants close on certain days or reduce opening times. This loses custom through confusion. People arrive to find the place closed and never return.
- Some see a successful similar business. Hoping to emulate its success, they open nearby. Customers might try the new place. The danger is that the same customers now spread their visits between the two destroying the viability of both.
- Location is crucial. Being in a place thronged with people, having easy parking nearby and away from social problems is important.
- Lack of staff training is a common problem. Too many shops and eateries have chaotic starts due to inept, untrained assistants and waiters.
- If customers and investors visit the premises, it is important to have a clean, welcoming and well-equipped enterprise. This does not mean that the most expensive, brand-new equipment and fittings need to be installed on day one. It may be better to upgrade as success develops.
- Putting faith in Gringo customers can be risky. They may gush with positive comments and praise at the start. They can also be fickle, moving on to the next place to open.
Improving the odds
What can be done to increase the success of startups in Costa Rica?
- For aspiring entrepreneurs, basic business training is needed.
- Perhaps financiers and investors should be more rigorous in checking the realism of business plans.
- Most successful entrepreneurs do not have instant success. Many fail a few times before finding a winning formula. They are resilient, optimistic, and determined. The important thing is to learn from their mistakes. Or, as a wise man said, ‘It can be less painful to learn from the mistakes of others.’
Chris Clarke is a retired businessman and economist, living in Grecia.
He worked globally with large organizations in government and the private sector. It also included over 40 years of experience with successful small businesses and in business education.
