New Businesses Often Fail For Noob Reasons

A large share of new small businesses fail due to rookie mistakes regarding basic record keeping practices and basic marketing practices.

A failure to follow basic business best practices in areas like marketing and record keeping is a major cause of business failure to small new businesses. Record keeping failures are mostly simply due to inattention and regular prompting on record keeping matters greatly improves record keeping activity and materially improves business survival. Failures to engage in basic marketing practices occur for more complex reasons, but regular prompting still greatly improves the likelihood that a new small business will engage in these practices which in turn makes them materially less likely to fail.

So, new small business success for novice entrepreneurs can be greatly increased with mentoring about basic record keeping and marketing practices, which are much less expensive to implement than the cost of a business failure.

In addition to establishing these points, the study below adds to the literature showing that providing relevant information at the moment that it is needed is much more effective than training and education well in advance of the time when what is being taught will actually be utilized.

Micro firms in low and middle income countries often have low profitability and do not grow over time. Several business training programs have tried to improve management and business practices, with limited effects. 

We run a field experiment with micro-entrepreneurs in Brazil (N=742) to study the under-adoption of improved business practices, and shed light on the constraints and behavioral biases that may hinder their adoption. We randomly offer entrepreneurs reminders and micro-incentives of either 20 BRL (4 USD) or 40 BRL (8 USD) to implement record keeping or marketing for three consecutive months, following a business training program. 

Compared to traditional business training, reminders and micro-incentives significantly increase adoption of marketing (13.2 p.p.) and record keeping (19.2 p.p.), with positive effects on firm survival and investment over four months. 

Our findings, together with additional survey evidence, suggest that behavioral biases inhibit the adoption of improved practices, and are consistent with inattention as a key driver of under-adoption. In addition, our survey evidence on information avoidance points to it as a limiting factor to the adoption of record keeping, but not marketing activities. 

Taken together, the results suggest that behavioral biases affect firm decisions, with significant impact on firm survival.

Priscila de Oliveira, "Why Businesses Fail: Underadoption of Approved Practices by Brazilian Micro-Enterprises" (Draft forthcoming).