Times are always tough somewhere. Countries, regions and industries all have economic cycles. Right now almost everyone is hurting due to COVID-19.
Economists and governments are expecting many job losses to be permanent. Unemployment is forecast to remain high for some years to come. That’s encouraging (or forcing) many of us to rethink our future and consider starting our own business.
This pandemic will pass. But as well as taking many lives with it, it will also claim many businesses – old and new – as victims.
Some of those business failures will be tragic while others may well be a blessing…
The real failure rate of start-ups:
You’ve probably read that 90% of businesses fail in the first year. That’s a myth. The true figure is more like 50%. BUT, if we consider successful growth as the key measure, 90% of new businesses do fail in the first five years!
So what can you, the aspiring business owner, do to ensure your dreams, hopes and aspirations don’t end up in the corporate graveyard?
Whether you’re in the planning stage, already have your feet wet or you’re in over your head, right now is a good time to understand why businesses fail:
1. No market!
Many businesses are started on a hunch rather that solid research… a perceived need rather than a real one.
Does your business concept really ‘scratch an itch’? Did you bang on enough doors or make enough calls to really gauge the need?
All too often new businesses are launched with very little objective data. We ask family and friends ‘what they think‘. Maybe we just asked the mirror! But family and friends are very rarely true prospects and your mirror certainly isn’t!
Identifying a need before pulling the trigger is critical to your business success. You can have the best product in your category, a sharp pricing structure and even a huge budget. But if no one wants you’re widget or service, you’ve bought a one-way ticket to failure.
If no one wants you’re widget or service, you’ve bought a one-way ticket to failure!
There is only one form of proof and that is when someone pulls out a credit card or checkbook to pay for your widget or service. Money talks, promises don’t.
2. Not enough capital
The second most commonly cited reason for small-business failure is not having enough capital. Insufficient funds is the business equivalent of ‘death by a thousand cuts‘. It leads to a slow and painful death by way of limiting your marketing, production and every other critical area of your business.
Insufficient funds is the business equivalent of ‘death by a thousand cuts’.
There’s often little you can do if your business doesn’t have enough capital to operate. Banks are typically loathe to back new ventures. Investors usually need to see ‘proof of concept‘ and sales before parting with their capital.
Even crowdfunding is a very selective process with the vast majority of campaigns failing.
Be pessimistic with your budgets rather than optimistic. Hope for the best, but prepare for the worst. How long can you survive before achieving a positive cash-flow?
3. The wrong team
Do you need a team at all? Some ‘solopreneurs’ are extremely happy simply achieving a ‘goal level of success’ and staying there.
But most new businesses reach a stage of growth where it becomes opportune and/or necessary to expand ‘the team’. This is especially important if you are building a business with the intent of selling it at some future time.
Or it may be that you recognize your business shortcomings even before you launch and look to fill that gap. For example, you may be a super-salesperson but an admin wimp!
… you may be a super-salesperson but an admin wimp!
Selecting the right partner and/or employees is as critical to your success as managing cash-flow is.
Friendships – and even marriages – can be strengthened or destroyed when you decide to work together toward a common goal. Who does what and when? Is there a clear and agreed objective?
Is this a nice person you are interviewing or the right person?
While it sure helps to like your employees, it’s their skillset that you are assessing. It’s far more important that you respect an employee or partner than like them. How will they contribute to your success?
It’s very rare that someone invents something absolutely unique. The reality is that competition extends into every market segment. We all want to believe that our ‘mouse trap’ is better. But is it?
We all want to believe that our ‘mouse trap’ is better. But is it?
Have you studied your competitors? The market leader and the ‘also rans’? We can sometimes become so obsessed with one or more aspects of our business that we miss what is really working for a competitor’s product or service.
Remove any bias and look at your competition objectively. What are they doing well that you could improve on. What are they doing badly that you need to avoid and perhaps even, capitalize on?
Pricing is the other major reason for small business failure. Pricing your product or service correctly can be hard. Some industries, for example software, often lack reference points to guide you.
If your pricing is too high, you’ll push away potential customers. Shoot too low and you risk being unable to sustain your business growth.
One very important key to profitable pricing is your image. The difference between a great website and stationary and a ‘cookie-cutter’ site and low image stationary is probably less than $1,500 to $2,000. But the adage that ‘you never get a second chance to make a first impression’ is never more true than when that prospect first meets your business.
The adage that ‘you never get a second chance to make a first impression’ is never more true than when that prospect first meets your business.
A trap that many new business owners fall into is price-cutting. It’s easy to believe you’ll get the sale/contract/agreement if you’re the most competitive bid.
But business – and life – rarely works that way. Value matters far more than ‘price’. In fact, discounting is simply a race to the bottom and a short-cut to failure as many Amazon vendors have discovered!
Value matters far more than ‘price’.
Determining the right price for your product or service isn’t an easy process. But, with rare exception, customers are far more likely to be influenced by ‘what they get’ rather than ‘what they pay’.
Summary (and a final thought):
There are many factors to consider, analyze and resolve before starting a business. But the five steps outlined above are absolutely critical.
Making the right decision at the right time is the road to successful growth. All it takes is the right data and a cool head!
And the final thought?
Recognize when it’s time to move to ‘Plan B’!
Many business ideas have failed and yet the business has succeeded!
There are many, many business ideas that have failed and yet the business has succeeded. The people in those businesses learned from their failures and pivoted. Like everything in life, starting a business is a learning curve with a very flexible pathway. Be ready to adapt!
Good luck. I hope to see you on the other side of five years!