You’ve probably heard about the Bloomberg report that confirmed eight out of 10 businesses fail within the first 18 months. It’s a scary data point that operates as a cautionary tale for potential start-ups. When you choose to build your own company, the odds are against you. If you’re considering such an endeavor, do your homework and learn from the mistakes of those who came before you. Here are four reasons why businesses fail and tips for how to avoid them.
Lack of a Viable Revenue Stream
No matter how great your intentions are for your new enterprise, there simply has to be a revenue stream. Without one, your new business has no chance for survival. Without money, you won’t be able to cover expenses such as your workspace, utilities, staff, or suppliers.
Too many founders of new companies are starry-eyed about how their business will function. They naively presume that as long as they offer a great product, the money situation will take care of itself. This couldn’t be further from the truth. If you want to avoid this issue, create a business plan complete with ideas on how to monetize your product quickly.
Would-be entrepreneurs start too many businesses without weighing the level of competition in the intended field. Market saturation spells doom for many fledgling start-ups. Some enterprises are de facto oligopolies that can only sustain a few legitimate companies. Even niche fields are oftentimes swarming with companies, and the Internet era means there’s more competition than ever. Companies that don’t take market saturation into consideration quickly discover that they’re playing an almost-impossible game of musical chairs for consumer dollars.
Even if you have what you consider a great idea for a new company, it’s important to investigate the level of competition in the marketplace. Overcoming this problem is more about perspective than business tactics. It helps to take a cynical point of view, presuming that other entrepreneurs have already mined all the best ideas. This should lower your expectations about the potential of your revenue stream, forcing a more cautious approach.
Awareness of market saturation will also create the ancillary benefit of heightening your competitive drive. The desire to prove that you can carve out your own niche in the marketplace will prove beneficial.
The brutal reality is that even those business owners who found companies in their own garages still need money. In order to provide a product or service, there are unavoidable expenses that many people fail to consider until it’s too late. Once they realize they’re low on funding, panic sets in, leading to poor decision-making as well as the potential for bad business loans from predatory lenders.
Poor funding is one of the easiest issues to address if you plan well in the beginning. Simply add a subsection to your business plan that estimates expenditures during the first two years. Pay special attention to the first few months, when costs have the strongest tendency to spiral. Determine how much money you’ll need as well as how much you can borrow without creating a burden on your company’s financial model.
Think about every business horror story you’ve ever heard. Blame always goes to the people at the top of a company’s food chain. That’s not coincidental: Poor leadership propagates throughout a company. If the people at the top are prone to bad decisions, their mistakes will cross boundaries. Hiring standards and practices will be poor, financial decisions ill-considered, and company goals vague. Companies rarely overcome the pervasive difficulties of dysfunctional leadership.
Whether you like it or not, the instant you found a company, you take on a leadership position. Behave accordingly, knowing that everyone you bring on board will look to you for guidance. It’s a high-pressure situation, and you may not feel up to the task.
The math shows that starting a business is extremely difficult. If you follow the steps above, however, you’ll position yourself better than the failed companies that came before you.