Old men playing chess in a park

5 Reasons Why Small Businesses Die in 5 Years and Why Freelance Businesses Might Not

80% of small businesses survive the first year, but only 50% see their fifth anniversary, according to this article in Forbes. The article lists five common reasons why any kind of small business might not survive:

  1. No market need
  2. Not enough capital
  3. Not the right team
  4. Competition
  5. Pricing

Which of those generic reasons that can kill any small business apply to freelance? Is there any real difference? Why freelance businesses might survive better?

First of all, let’s define what we talk about here. In the context of this article, I’d say an actual freelancer is someone who is not attached to any other business than his or her own in order to earn enough to make a living. Thus, I exclude all part-timers who are still getting a stable salary in some form from someone else’s profitable business. Also, I definitely exclude all those who do freelance after-hours only, i.e. evenings and weekends.

The big difference here is dependency. Does a person depend on his or her own personal ability to find and satisfy clients to the extent that there is no other source of income than the freelance business itself? If yes, that’s what I call a real freelancer.

Let’s examine each of those five reasons that kill small businesses separately to establish a comparison between freelancing and other small businesses.

Why freelance businesses might survive is because good freelancers play the game as if it was chess

What could make your freelance business die in five years and how to avoid it?

1. No market need

In general, the market need for freelancers is only growing, according to … well … anybody. The market need is not really a big issue for freelancers for a simple reason: Nobody starts without looking around how others do it first. Always there is some kind of a starting point or an example that you can look at and mimic.

Mimicking, of course, doesn’t guarantee any success in the long run, but let’s say reading a couple of articles, interviewing some freelancer friends, checking out market prices … everyone reasonable does those things before jumping into the deep water. A simple example: You know someone who started freelancing using some of the online platforms, so you just sign up and try the same. The model is there for every freelancer already.

Now, the difference between any typical business that sells products or services and a freelance business is that as a freelancer you are your own product and your own time is your service. If you had a job before and got good at it when working for someone else, you already have a good idea about the big picture of the industry.

When stepping into the freelance world the biggest challenge might not be the doing-the-work part, but marketing and sales, and building your own personal brand. You just need to productize yourself, here, whereas the market already exists.

The market need is less of a problem for freelancers compared to other businesses, especially those that are based on selling only 1-2 products. Whatever you do as a freelancer, there will be a need for your services. Most freelancers seem to do what others do and offer their own services in an already established freelancer market if we look at the big picture. Very few try to offer a completely new category of things.

Freelancing is not like that. No freelancer creates an entirely new market.

So, I’d conclude that all the other reasons for dying off are probably bigger than the market need for years to come.

2. Not enough capital

Every single business needs a runway before taking off. For normal small businesses, Forbes mentions that one-quarter of businesses don’t have enough funds to run the business at some point in the journey.

You might think that freelancers don’t need initial capital, but they do. (Please keep in mind I exclude all but full-time freelancers here.) Got a house loan that needs to be paid? Got a family to feed? Personal and family expenses must be covered. There is little chance that when you start full-time you have everything figured out and you get full pay from Day 1 on.

You can reduce the risk by starting soft, meaning that you do little gigs from the safety of your fully paid day job before you turn into a full-time freelancer. Even in that case, the job is different, most of the time.

There are industries where the only job available for freelancers is something that you do in a couple of hours, but in usual cases, full-time freelancing means you must do bigger projects than when doing part-time. This is the case for all (and I really mean 100%) of software developers, for instance.

Let’s say you’ve started exploring and trying if freelancing is something for you and did a couple of bug fixes worth $100 each. It’s good money when it comes on top of your day job’s salary, but a horrible and completely unscalable freelance business when done full-time.

So, full-time freelance software developers need to find complete projects to run, either as an expert developer as part of the client’s development team or more like a CTO-as-a-Service that takes care of everything technical for the client. Either way, a hundred small gigs done in a month is not a viable option because of the overhead of getting each gig, which is more or less constant. Big gigs are needed.

So, the capital you need when starting up your full-time freelance business needs to be in place. It can well take half a year or even a full year before you get your hands on decent clients, decent projects, decent bucks per hour, and decent annual income. The next year goes better. The third one could be dynamite! It is a very real risk that your personal runway made of cash in your bank account might be too short.

The survival strategy that I’d recommend for a starting freelance business is to quickly try to find different ways to reach a different set of clients to see what works best for you. Don’t rely on the most obvious one, only. Finding different methods for reaching your clients will shorten the financial runway you need before you can make a decent living.

Continuous experimentation and improvement reduce financial risks even in the long run, despite the fact that it will take some time off from executing your projects on a regular basis.

3. Not the right team

You might think this is irrelevant in the case of freelancers who just work as individuals. You couldn’t be more wrong! You may start completely solo, but the only way to grow your freelance business is to team up with others in some way. And there are so many good ways!

Once your freelance business grows in terms of the hourly rate and your clientele keeps you busy every day of the week, the only way to improve your personal efficiency which defines your revenue is to hire others to take care of all the business support work, such as bookkeeping, lead generation, etc. tasks that are not part of your execution work.

The major difference here is that in a normal non-freelance business, the team has a more critical function than in a freelance business. The freelancer is the one delivering the core services which bring the money.

The rest of the team is more or less replaceable, especially if it consists of other freelancers. Teaming up with other freelancers is probably the best way to ensure your productivity without creating a critical dependency on any one person, which keeps your business lean and cost-effective.

The team issue is not very critical for freelance businesses. Yet, there could be many minor obstacles in getting the support team functional, but those obstacles won’t have a fatal impact unlike in many other businesses.

4. Competition

The competition is probably the most obvious point. Freelancers who don’t manage to define and execute the business in a carefully chosen niche market that they can “own” are at the biggest risk of getting outcompete.

This is especially true if you do remote work online for global clients where initial connections are nothing more than a quick text chat or a short video call which are easy for the clients to detach from. It is less of an issue if you play the local game with IRL contacts who you meet face-to-face.

Forbes mentions that “sometimes, business owners become obsessed with one or more areas of their business while ignoring what really works for a competitor’s product or service.”

This applies to freelance businesses too, for sure. The competition is something that a freelancer has to take into account not only in winning individual projects but in the long run too. In the global freelance arenas, you cannot expect to be the top guy doing the exact same thing five years down the line. Even the best freelancers go through different phases and offer slightly different services depending on the market need.

For software developers, it could be changing your development stack(s), targeting a slightly different application domain, or something minor. Bigger steps would include buying new hardware to develop software on or shifting from an old programming language to a new trendy one.

It is common for freelancers to practice and hone their skills regularly. This is a good practice that keeps you learning something new on a regular basis. It plays into your pocket very well since you can always take some time off from project execution to learn something new that keeps your freelance offering competitive.

Usually, this process is quite natural. It is easy to find a skill that is not so far off compared to your original offering, which makes the learning process go quickly. The best survival strategy here is to reserve dedicated time for these learning activities.

5. Pricing

For most freelancers, pricing is a tough issue that is heavily coupled with the competition. Nobody would hire a freelancer for $50/h if the option is $30/h if the end result is identical, right? That’s not entirely true. As a freelancer, you are the product. Therefore, the experience of working with you is also part of the deal, and even we can put price tags on that too.

A programmer who usually misses deadlines by a day or two but does the work at a lower rate than another one who is always on time might be left behind by the client. Especially small organizations often cannot risk delays or complications of any kind and rather pay more to get the job done right rather than taking a risk with the cheapest guys. Making the experience of working with you a pleasant experience is a good way to avoid pricing battles.

The other survival strategy is obviously specialization. The pricing never becomes a big issue if you’re selling a specific service to specific clients and face little competition in your niche market. Avoiding the pricing battle should be the aim of every freelancer. In the best case, you’d be able to choose your price quite freely.

Why freelance businesses might survive: The conclusion

Of all the most common reasons that kill small businesses in five years according to Forbes, two turned out to be non-critical for freelancers. The market need is there for years to come and having the wrong support team is usually not a difficult problem to fix.

The other three reasons are completely valid. The risks of not having enough capital, getting outcompeted in the long run or falling into a pricing battle with other freelancers offering definitely apply to freelance businesses.

One of the cornerstones for safeguarding your freelance business is your ability to find and execute a niche freelance business where the competition is minimal and you have the opportunity of choosing your price. The other one is keeping a reasonable capital of 6-12 months when starting freelancing, which is rather obvious. Lastly, your ability to transform your offering to evolving market needs by learning new skills is also very important.

With these three survival strategies, your freelance business would have a good chance to see its fifth anniversary and beyond. Especially if you manage to build a high-value business that is based on your unique strengths and to dominate a niche market!