Jane Lindhe Reporter

Jane is a retail and small business writer with a special interest in emerging companies and entrepreneurs. She covered the financial services industry before moving into general business journalism and has written for The Age and The Australian Financial Review.

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Surviving the first four years in business

Published 09 August 2012 03:50, Updated 16 August 2012 04:16

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Surviving the first four years in business

Surviving the first year is difficult (“First year hurdle”, BRW August 2-8) but it is often the few years in business that can make or break a start-up.

The first four years of a business probably will be the toughest time of any operation. It is no coincidence that 75 per cent of business failures occur within the first four years.

More than half of the businesses on this year’s BRW Fast Starters list cited years two to four as the most challenging to navigate, as micro-businesses evolved into small businesses.

That was certainly the case for Sydney in-vitro fertilisation company, Demeter Fertility, ranked 94th on this year’s BRW Fast Starters list.

In its second year of operation the global financial crisis hit, not only affecting global economic conditions but causing the demand for IVF in Australia to dip.

“Because of changes at Medicare and the combined pressure of the GFC, the whole IVF market regressed by about two to three years,” co-founder Rod Hozack says.

“Birth rates not only fell in the so-called ‘normal’ population but also in IVF.”

Hozack and co-founder Mikael Hatzis based Demeter’s business model around organic growth in the IVF market (which was experiencing year-on-year growth of 5 to 9 per cent) when the market suddenly went flat.

They say established IVF providers essentially “shot themselves in the foot” by promoting the fact that Medicare changes were going to make IVF more expensive, “scaring people off” the procedure.

Rather than progressing with their plans for organic growth, Demeter chose to change the company’s business strategy to compete for existing market share.

Hozack and Hatzis adjusted the strategy to focus on expanding the business – based in Liverpool, Sydney – while increasing their promotional spend to inform more general practitioners about their services.

That involved some tough, albeit necessary cut backs in remuneration, staffing and expenses, Hozack says.

Hozack and Hatzis say their experience working with global, Fortune 500 companies in their other business, management consultancy Integratos, helped them to promptly adjust their strategy, scale down their operations and adapt to the changing market.

It is the inability to act quickly that often trips up businesses in their first few years of operation, they say.

“Through Integratos we had adopted the best practice knowledge of large international companies – we learned their tricks,” Hatzis says.

“We have a business plan that looks 24 months ahead and are able to pull certain levels, refine our trajectory and reallocate our resources based on what is happening in the market and what we predict for the future.”

It is experience, too, that has taught businessman Simon James how tough it can be to take a business past its start-up stage.

The self-confessed “born entrepreneur” had several businesses before starting his business-to-business marketing and development business SIMJEN in September 2009.

James, who has worked as a consultant to hundreds of small businesses over the years, says it is SMEs’ lack of systems and processes that trip them up in their early years.

“As you grow, you need to become better at trusting your team and learning how to delegate. Most entrepreneurs have trouble letting go of the small stuff,” James says.

“I constantly hear clients say, ‘What I do can’t be systematised because there are too many variables’.

“I usually remind them that they are not special and that every business needs systems.”

James, who manages more than 100 staff, says business owners need to focus on what they do well from the beginning and employ people with the right skills to do the rest.

An entrepreneur’s ability – or inability – to “let go” directly affects the growth prospects of a business, he says.

“If businesses focus on developing systems from their first week in operation, they make things capable of being replicated.

“Business owners are nervous about losing their identity to a system but what a system does is free-up their time, which allows them to add more identity to the brand.”

The pressures facing businesses in their first few years of operation – from a changing market to a lack of adequate business systems – are often enough to destabilise a business.

However, it is often the challenge of navigating through the pressures and sense of personal responsibility that come with a growing business that business owners find most difficult.

Holiday Centre chief executive Randall Deer says his company’s “in-between stage”, its second year, was its most difficult year. The Holiday Centre was ranked eighth on the 2011 Fast Starters list.

“You’re already committed, you have a handful of staff, so a failure of the business will have an impact on many livelihoods,” he says.

“You can’t quite afford to have all the support in place, so you’re juggling [at the] front line and strategy all at once.

“You have leases and fixed costs are creeping up but you’re a small
business [and] no one has heard of you yet.”

It is no coincidence that businesses often fail in the second or third year of operation as they transition from a micro-business into a small business, Deer says.

“You’re playing international cricket with a Kanga bat,” he says.

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