You have a great idea for a business, the drive and passion that could make a business succeed, and the willpower to push this thing into life.
Of course, you’re going to make a few mistakes – It’s all a part of the learning process. But will you make one of these 10 mistakes that can kill a start-up?
Not if you read this blog post!
I’ve rummaged through the internet, reading, oh I’d say close to a billion articles, to come up with the top 10 reasons that start-ups fail. Heed these warning, and learn from these mistakes so that you avoid the fate of 90% of start-ups!
1. Failure to prepare a business plan
In the “Seven Habits of Highly Effective People” Stephen Covey states that you should “begin with the end in mind”.
This is where your business plan comes in.
Sure, you’ve a great idea – But where do you want it to go?
Creating a business plan will allow for you to gauge exactly what resources you’ll need in order to succeed, and what are the different outcomes that you expect to see. It gives you some clarity with regards your business goals, and allows for you to understand what areas are urgent, what areas can be prioritized lower on the scale, and where to put your resources.
“People don’t plan to fail, they fail to plan”
Out of all the mistakes that can kill a start-up, undercapitalization is the surest way to a swift death.
When creating your business plan (which should include your financial planning) be sure to be as accurate as possible with your projected expenses. Some questions to consider when creating your financial plan are:
- How much do you need?
- What will you use the funds for?
- Where will you get the money from?
- How much profit do you forecast your business will make in the first year, 2 years, 5 years…?
It’s critical that you get the right capital for your business from the start, otherwise, you’ll find that you’ll begin to rely more and more on debt, with no equity to back you up.
Eventually, just as you get 90% of the way there, your business will crash and burn. That’s a lot of time, money and energy wasted because you didn’t have quite enough capital to finish your endeavor.
3. Chasing Turnover At The Expense Of Profits
While we’re talking about money, let’s talk about where your priorities should lie.
You’ve probably heard the old saying: “Turnover is vanity, profits is sanity,” but are you living by its wisdom?
Here’s the simple truth: It doesn’t matter much money you’ve acquired in a particular period if none of it is yours. The entire point of a business is to be profitable. Focusing solely on a high turnover rate has been the death to many businesses because while they may be scoring a $400,000 contract, they might be spending $450,000 to fulfill it – Quickly catapulting them back into the scary abyss of debt we were just talking about.
And it’s not just about debt, it’s about employee morale.
Working for a start-up or small business can be pretty stressful already because the success of the business is largely dependent on how well you do your job. Bringing in more and more business is great, but how does it affect your employees? Are you training them to cope with the new work load? Are you employing someone new? (in which case, can you afford to using the money from the new contract, or through your own capital?) Does your new contract mean that your employees are working excessive amount of overtime?
Chasing turnover at the price of profits will drive your business into the ground eventually.
4. Not Reinvesting Early Year Profits To Achieve Stabilization
Ok, so you’ve heard the quote “turnover is vanity, profit is sanity” and you’ve taken its words of wisdom and have come out at the end of your business year with a profit! Congratulations!
Well, you can stop living off of noodles, that’s for sure.
But don’t go buying that Porsche just yet. There’s something else that the money should be going towards.
Too often, business owners see the cash come in and reinvest it… in themselves. They upgrade their houses, cars and holidays and live the life of luxury – For a year or two.
When your business starts to gain momentum, it’s the perfect opportunity to reinvest that money into the business and work on perfecting your processes, honing in your employee’s skills, revamping office space, investing in better marketing, expanding your business, etc. By reinvesting your early year profits into your business, you’re ensuring the business’s longevity.
5. Too Eager To Expand
So many businesses see a profit, and think that it’s time to reinvest the money and use it to expand. But profits are definitely not the only indicator that you should use in order to gauge if your business is ready to expand.
Of course, expansion is the nature of business, so you should plan to expand… eventually.
But first, you have to be ready and it’s not “I came out with a profit this year” kind of ready. It’s more like, “I have cash, access to credit, access to equity, key staff and management in place with the necessary knowledge and skill sets they will require to take this business a step further, a systematic business system that has been established in the minds of my employees that can be translated and implemented in other work spaces, secure supply lines and good relationships with my suppliers” kind of ready.
I know, that’s a lot of ready.
And unfortunately, this kind of business growth and resource accumulation are things that happen organically as your business begins to find its feet.
But when it comes to preparing for expansion, “practice makes perfect”. Let your business grow organically by giving it time to do so. Your first year of profit isn’t necessarily the time you should expand (unless, of course, you do have all the listed resources available). Instead, reinvest the money into improving your business and honing it into a powerful machine.
By the following year, you’ll have the resources so that the expansion will be much more likely to be successful.
6. Failure To Accept Advice From Others
Even huge tycoons like Mark Zuckerberg appreciates that they couldn’t have done it all by themselves. Recently, in a first of its kind Facebook Q&A Zuckerberg responded to the question “How did you overcome the obstacles you faced in building Facebook?” saying:
“The thing that got me through it and I think gets a lot of people through it is the people around them…. Companies that have more founders are actually more likely to have a successful outcome, and one of the reasons for that I think is it’s just really hard to do anything on your own like this. One of the things that I think the media gets wrong about companies or inventions or things over time is they try to make it seem like one person did it.”
No one knows how to do it all, not even Zuckerberg so it’s important to be open to listening to other perspectives, to people with an expertise in particular areas (accountants, lawyers, marketers etc.) Even friends and family can be a huge asset to you if you let them be.
No man is an island.
7. Inability To Deal With People
Unfortunately, we don’t all get to stomp around like Meryl Streep in Devil Wears Prada. You can’t be unlikable when you’re starting a business – you’ll eventually be hung by your own tongue!
Being nice doesn’t doesn’t only apply to your precious clients. Too many businessmen turn on the charm just in time for their clients to walk in the door, but are quick to shrug off their staff the next moment.
Here’s the thing: Your staff are keeping your business alive. They’re doing the work that you either don’t want to do, or that you can’t do if you want to grow your business. Without them, you’d flop.
I’m not saying that you shouldn’t command respect, be able to give orders and direction without any qualms, and be the bad guy once and a while when situations require it, but you also need to learn to be someone that people want to work for.
Hiring new people takes a lot of resources. Reduce the wasted resources by not being an a…. well, you know.
8. Failing To Adapt To Change
Another personality-related issue: Failure to adapt to change.
The world has started to change rapidly, with every year, every month, every week, every day even, bringing us new innovations and technology that could potentially revolutionize the way we do business.
As a business owner, you need to be able to adapt to change. You can’t hold on to practices because “this is how we’ve always done it”. Things have changed, business has changed, you need to change.
If this isn’t your area of expertise, what you can do is listen to others that are more tech savvy than you. Try and understand the innovations and what applications your advisors see them having on your business. I know it’s scary, but it’s the future and if you want your business to be a part of it, you need to keep up.
9. Management Issues
Management issues are often cited as the number 1 reason that most businesses fail.
There’s a fantastic Bill Gates quote that goes: “A players hire A players, B players hire C players, and C players hire losers.” The idea is simple: Quality begets quality. If you have a high performing management team, they won’t hire anyone but the best to work under them. However, if you hire a low or mediocre performing management team, they won’t be as determined to hire quality talent.
This diminishes the quality of your entire business.
But who are the A players that are ideal for management?
One mistake that business owners make over and over again is to conflate industry skill and experience with management skills and experience. The truth is that managerial skills and trade skills are separate things. Just because someone has 10 years in an industry, doesn’t make them manager material.
The ideal candidate has both manager and trade skills to ensure that decisions that are made at managerial level have taken into account the industry-specific features that may have an influence on the decision making process.
Finding this person is never easy, but it’s well worth the search.
10. Over-dependence On A Single Customer
You finally landed that huge client and you’re ecstatic! Things are going well, you’re doing the work, your relationship with the client is blooming and everyone’s happy.
Getting complacent when scoring a big client is one of the major mistakes that can kill a start-up.
Have a look at your revenue. Does this customer account for 50% or more of your company’s total revenue? And if you’ve answered “yes”, then you’re probably too dependent on one client. Think about it: That’s half of your revenue you’ll lose if you lose this client.
But you can’t just not take on a big client just because they may become a huge part of your revenue, right?
Right. That’s just bad business.
But taking a big client doesn’t mean you have to become complacent either. If you get a big client, don’t kick your feet up and imagine that you’ve officially made it.
Instead, keep marketing and looking for new clients. Bring in new work so your bigger client doesn’t take up such a huge percentage of your earnings.
What are some other mistakes that can kill a start-up that you’ve encountered? Please share!