This post originally appeared at thesageowl.com
If you start a business it will probably fail, especially if this is your first run as an entrepreneur. I’ve been on startup teams that failed. I’ve joined established businesses in the process of failing. And I’ve now founded companies in the middle of a pandemic (success or failure TBD). The majority of new businesses will fail within 10 years of founding. Almost half within 5 years and about a quarter within 18 months.
Starting a business is easy. Any idea and a few hundred dollars can get you up and running. Keeping that business alive through a gauntlet of never-ending challenges is not. But most failures are a result of not understanding what it takes to succeed in the first place. Owners have access to any number of excuses when things don’t work out, but it usually boils down to just a few factors. You don’t need to be a tech genius or have a Harvard MBA to succeed. What you do need is a basic understanding of business and the ability to learn fast and adjust along the way. Get the following things right and you’ll be better positioned than most companies out there today.
Leadership
The success of any organization begins and ends with leadership. Good leaders can get their teams through almost anything. Bad leaders push their teams to quit. Unfortunately, leadership skills seem to be lacking in many organizations. It’s easy to get lost in the details and forget about the people around you when pressed to do more every day. Good leadership is not hard, but it does take skills that often aren’t rewarded in other circumstances. It takes humility and self-awareness to know when you need help from others in the first place. It also takes empathy to treat people in a way that makes them want to build something with you. Employees just showing up for a paycheck are far less effective than ones that want to help you succeed. Even a one-person company will need support from other people to grow. If you’re not worth following you’ll eventually be constrained by your own limitations.
The “tone at the top” is an accounting term most often discussed around ethics and fraud risk. But the concept is generally applicable across the entirety of any organization. Leaders are the benchmark for everyone else in the company. It doesn’t matter if you have 1 or 1,000 employees. They will not succeed if you are not performing. Company leadership defines the culture, sets the standards, and establishes the norms by which everyone else in the organization will be judged. If a business fails for any reason, it is the fault of its leaders. Hold yourself accountable to this and you are far more likely to succeed.
Vision/Plan
How will the world be different once your business exists? Answer that question and you have your vision. Most people see a vision as this grand goal to become a global phenomenon. This can be true. The tech unicorns of the last 20+ years prove that a vision can result in billions of users and billions of dollars before any profits are made. But a company’s vision only has to be as large as its target market. A local coffee shop shouldn’t start with a vision for world domination (that already exists). But they do need to know how they’re going to offer a better experience than currently exists in their market. If you don’t know how you’re going to add value to the world you don’t have a vision yet and you shouldn’t start your business.
Your vision is the mountain you want to climb, your plan is the step by step process you follow to get to the top. There is an increasing trend to avoid traditional business planning. This is a trend I mostly agree with as full business plans take a lot of time and effort to create. They are also outdated almost immediately. People can now start businesses targeting one market. Pivot, multiple times if needed. Then end up in a completely different market or business model. Up to this point, extensive planning would be a waste of time. You are better served experimenting with the best ways to solve your market’s problems. But eventually, you end up settling down on a product or service and a business model that makes the most sense. At this point, you should have a plan to reach your target market and an estimate of how much it is going to cost to execute. Greater scale requires greater planning. This forces you to look toward the future, anticipate what needs to be done, and predict problems that may arise along the way. Plans can and will change. But having one in place gives you and your team some guide rails to keep everyone moving in the same direction.
Marketing
Most people think marketing is about advertising, public relations, generally getting attention. But it has much less to do with pretty graphics and catchy taglines than it has to do with data. Marketing centers around gaining a complete understanding of the customers that are going to buy what you are selling. That means knowing how large your market is by both customer and dollar amounts. How much they can and will spend on products like yours. How they make the decision to purchase and where they make that purchase. And most importantly, how to reach them and convert them into customers in the first place. All too often entrepreneurs operate under the “if you build it, they will come” theory. Unfortunately, chances are that if you build it, but don’t understand who is going to buy it, nobody is going to show up.
The only reason any business exists is to solve a problem for its customers. Identifying your market and understanding the value that you are adding should be priority one for your business. Don’t waste money on those pretty graphics and catchy taglines until you know where to target them. Most business failures are driven in part, if not entirely, by a failure to understand their market.
Finance
Money is the blood of every business and when it runs out your company’s done. Businesses take time to grow. Even if you get everything else right, if you don’t have the money to survive until you breakeven, you will fail. Too many people start companies without having the funds necessary to make it to that point. Don’t count on opening the doors and immediately covering your expenses with profits. Can that happen? Yes. Is it likely? No. Yet countless entrepreneurs invest huge amounts of time and money in ventures that fail within months.
It will always cost more to run a business than you think. Plan to work for free at the start (or at least for much less than you can make at any job). And have a cash cushion of at least 6 months of operating expenses banked before you begin. That might mean building something as a side hustle while you keep your day job. Or living off of ramen while you develop an app. Or saving up $2 million to open up a McDonald’s franchise. Just know how much you need before you start and bootstrap until you don’t have to.
Aside from covering your costs, if you own or manage a business you need to understand basic finance. You don’t need to be an accountant, nor should you spend all your time trying to become one. You can always hire an accountant or outsource to a firm. But you are ultimately responsible for the information they present. If you don’t understand your financial information, you don’t understand your business.
Systems
Broken or missing systems are probably the most underappreciated reason for business failure. But a lack of good business processes can derail any company at any point. Even if they don’t cause outright failure, your systems will be one of the largest inhibitors (or catalysts) to growth. Good systems scale. Bad systems require micromanagement and increase risk. A bad accounting process can lead to bad information and cash management. Sloppy manufacturing processes can lead to liability and PR problems. And poor human resources processes can leave you with high turnover and an ill-equipped team. At best solving problems caused by broken systems is a waste of an organization’s time and money. At worst the consequences of regulatory penalties, PR nightmares, and lawsuits can put any company out of business.
Systems issues are one of those problems that get exponentially worse with scale. You can often run a new business on the fly with minimal real systems in place. This does allow freedom when the company is small and the consequences of process breakdowns are minor. But as a company grows the consequences grow much quicker. System breakdowns are self-inflicted wounds. Every business should continually seek to improve processes when breaking points are exposed. The more time you spend putting out fires, the less time there is to work on improving the company.
Summary
Building a lasting business takes a lot of time and even more work. You don’t need to know everything at the start, but you’ve got to be able to learn along the way and adjust constantly. This is the reason that serial entrepreneurs get more successful over time. Experience (good or bad) builds expertise. They have been there before and have most likely had many failures along the way. So even if your first (or fifth) venture crashes and burns, just take a step back. Take stock of everything that went wrong and learn what to change next time. Then find another idea and another few hundred dollars and start all over again.