Ever wondered what the business failure rate is? Between 75% and 90% of all new businesses fail within the first 10 years. If we also take most dotcom startups into consideration, 9 out of 10 new businesses won’t make it to their third year. The actual figures vary according to the source, but it looks like the overwhelming majority of startups end up failing.
In my opinion, in most cases startups don’t fail, they just run out of money. Let me explain.
When they start a business, the first thing that most people do is write a business plan explaining how you are going to promote your business, how you are going to find your customers, and what you are going to offer them. You come up with sales projections and make a lot of assumptions.
If your startup capital is $20,000, maybe you will spend $10,000 to launch the business and promote it. But here is the problem. When you start a new business, no matter how much you think you know about it; you have no clue. Most businesses have to change their business models at least five times during their first year.
Maybe you thought that your target market was stay-at-home moms but they are not buying your products; high school girls are! What are you going to do about it? Are you going to start thinking what is it that you are doing wrong and how to get stay-at-home moms to start buying your stuff? Or you are going to understand that the market defines your business, not the other way around, and change your business model to start selling to high school girls?
Flexibility and observation are two of the most important qualities an entrepreneur should have.
What happened with your target market will happen with almost every aspect of your business. The promotion methods that you thought were going to work actually don’t, you need more employees, and your expenses are higher than you anticipated.
Socrates lived a long time ago, but something he said still applies: “all I know is that I know nothing”. Planning is very important. Making assumptions and forecasts are vital. But don’t think for a second that you are going to get it 100% right, especially if this is your first business.
I said earlier that the main reason why businesses fail is because they run out of money. And they run out of money because they expect everything to work as planned and when it doesn’t they have very few resources left to keep the company alive.
I believe that 90% of the companies would become successful if they could make it through the stage when they are trying to figure out their business model. It is just a matter of surviving until you can learn what works for your business and what doesn’t.
Be humble, you don’t have all the answers. The market is going to teach you what works and you have to keep your eyes open and learn. Instead of investing all your marketing money at once in huge newspaper ads targeted to stay -at-home moms, use that money to test 10 different promotion methods and two or three different target markets. Learn from the experiment. Now you have a much better idea of what you need to do more of and what you need to stop doing.
They say that entrepreneurs have to love risk. That’s not true. You have to minimize risk as much as you possibly can. Isn’t testing, learning, and putting your money where it is proven to work a lot smarter than guessing what’s going to work for you and betting all your funds on it?
Remember, one of two things will happen to your business: you can run out of money before succeeding or you can succeed before running out of money. Take care of every dollar as if it was your own life. Test a lot before putting all your eggs in your basket. You will eventually figure out the perfect business model. Just make sure your money lasts long enough.