The Longevity of a Business
Updated: Mar 9, 2022
Many people who set up or start new businesses do so with the vision that the business will grow to a level that will be self-sustaining, see them through to retirement and allow them to hand it down to their children. In 1958 the average life-span of an S&P500 company was 61yrs, today that number is 18yrs (McKinsey). The average life-span of a startup is 18mths and 50% of new companies are gone within 5 years. This is not necessarily bad news though. The rate of development of technology is such that a business can be established, grown and sold or wound up within two years and still make a lot of money for it's owners and investors. Many businesses are set up to do just that, to attract investment to develop a technology to a certain point and then leverage the IP or sell the business at a high profit. So it is important when thinking about starting a new business what the end game is and whether it will be what I call a project based business or a longevity business.
A project based business is a perfectly legitimate business model. It has a projected start date, end date and defined objectives to meet within that timeframe. It may be necessary to set up a company, a bank account and all of the other elements of a business in order to trade even though you know it is only for a pre-determined time. It might be that the venture is set up to exploit a particular opportunity in the market that will only last for a couple of years and, having made your money, you envisage winding up the business in a formal process that ensures all creditors are paid and any staff, investors or shareholders are dealt with according to their contracts. Many assets can be leased and those that cannot can be written down and sold at the end of the project. With the end game always in sight and a clearly defined timeframe for accomplishing things, this can be a useful way of focusing and motivating the team to deliver quality outcomes rapidly.
The more traditional business model is what I call the longevity model - that which does not have a pre-determined end date but is expected to grow and remain profitable over a period of 10-20 years. As mentioned above, in most cases, it is no longer reasonable to expect a business to survive longer than this. The key to the growth and development of a sustainable business is finding a way to make it independent of the owner or founder as early as possible through the establishment of clear processes and procedures that staff can follow to deliver outcomes. Many startups remain beholden to the founder for day to day decisions for years and although the business grows and is successful, it cannot be sold, invested in, or even operate independently of that person. By identifying the core competence of the business and documenting processes around it, the business can be run without being heavily dependent on one or two individuals - the process runs the business and the people run the process. This model is very apparent in the likes of a franchise such as McDonalds where there is little or no deviation from the process and as long as people are trained to run the process, the burger you get in Sydney is the same as the one you get in New York and London.
Longevity businesses can be invested in by people looking for dividends as well as long term growth whereas project businesses are invariably invested in by those looking for short term capital gains. The longevity business will typically have a long term (5 year) strategic plan and will be more vulnerable to outside environmental changes (such as recession) than project businesses. Having said that, if Covid-19 has taught us anything, it is that the world economies can turn in the space of a couple of weeks, so nothing is predictable or certain in this age of globalization and technological advancement.
The project model is worth considering for the simple reason that it instils discipline into the team and keeps them focused on delivering outcomes by certain dates. There is a limited budget available and if the budget is overrun or the deadlines are not met, the project is abandoned or reinvested in accordance with the rules agreed upon at the outset. Many startups lack discipline when it comes to these types of rules and end up pouring additional money into a failing business in the hope that it will eventually come good instead of shutting it down early and cutting their losses. I know this because I have done it myself and have learned hard and expensive lessons by allowing my emotions to over-ride my own rules.