Those who hit it big with a million-dollar idea always seem to get all the attention.
But, as many entrepreneurs will tell you, it is the businesses that crash and burn that sometimes teach the best lessons.
“You learn way more in failure than you do in success,” said Dan Lauer, founding executive director of UMSL Accelerate at the University of Missouri-St. Louis.
Failure is common. According to an article by Georgia McIntyre of Fundera.com, half of new businesses are gone after five years and 20 percent of them won’t even survive to see their first birthday. It prompts two important questions: Why do so many businesses fail and what pitfalls can entrepreneurs learn to avoid?
Often, the answer is simple. You just may not have the right product.
“A lot of times what we’ll see is that the market the client thinks is there may not actually be there,” Jason DeBode, assistant professor of management at Missouri State University said. “They’ve effectively developed a solution for a problem that may not actually exist.”
But DeBode points out that even entrepreneurs who have something worth selling and someone eager to buy it can find themselves in a mess if they don’t consider the logistics of cashflow. It isn’t just about seeing if you can make money. It also matters when you can make that money. Hitting the end of your credit line halfway through can lead to a lot of broken dreams.
“While they may be projecting to earn a year-end profit, two months in, they’ve exhausted their working capital and they don’t have enough money to cover their bills or pay their employees,” DeBode said.
He advises that startups avoid padding demand estimates with rosy figures when reality may require a longer period before the business sees enough market share to hit break even.
DeBode said that a “soft launch” or “prelaunch” can allow entrepreneurs to gather feedback from potential customers. He recommends working with a small business development center that has resources that can help one better understand the fiscal challenges in the marketplace.
He also said to make sure you have committed investors, as opposed to vague statements of intent from well-wishers who don’t really plan on anteing up but may not feel comfortable saying so directly.
“Sometimes, friends just don’t like to tell you ‘no,’” he said.
But even friends who say “yes” can be a problem – especially when they take an active role in the business and personal disagreements over cash and strategy can bubble to the surface.
“Try to put everything in writing,” said Ben Blackford, director of the Melvin D. and Valorie G. Booth School of Business at Northwest Missouri State University. “Have a partnership agreement of all the founders. This is who is going to contribute what. This is how any profits get divided. This is how losses get divided. This is how decisions get made.”
Blackford said that personality conflicts can doom a business, especially without a formal arrangement that outlines what everyone’s rights and responsibilities are. That blueprint should be drawn up before the players have put their money in – not after.
Moreover, that isn’t the only “people problem” an entrepreneur might run into. Simply being unable to find workers can make or break an operation.
“That’s one of the main things that small business owners will use as the reason they didn’t expand,” he said.
Back at UMSL, Lauer recommends that entrepreneurs do their homework from the start with surveys of potential customers to see not only if your product or service is desirable but what people are willing to pay for it and whether it is realistically possible for you to sell it at that price point.
“If it is worth ten and you are charging 60, that’s a problem,” he said. “Product/market fit is a big deal.”
Moreover, if you are going to flounder, do it quickly and in the early, less expensive research stage. Completing your due diligence before investing funds is the best way to avoid dumping good money on a bad concept.
“What we teach at UMSL is learn fast, fail fast,” he said. “Don’t get a second mortgage on the house if you haven’t fully done your homework.”
Understanding that homework is a big part of composing a business plan is an important key to doing well. Natalie Redmond, senior vice-president of membership at the St. Joseph Chamber of Commerce, said that without a plan, an entrepreneur might find themselves flying blind.
“A lot of people don’t really have that clear vision or that strategy to make sure they are going to set themselves up for success,” she said.
Redmond also noted the core problem that seems to plague so many startups: a founder who understands the field but not the logistical necessities like bookkeeping, fundraising or human resources.
“They are really good at making that product, but they are not necessarily good at every aspect of the business,” she said.
That’s particularly true if your business picture suddenly changes – an unfortunate reality that claimed thousands of startups over the past year as companies big and small tried to navigate a strange new world of lockdowns, capacity restrictions and the endless uncertainty of a universe turned upside down by COVID-19.
“I think it is always good to have a savings built up to support your business should you get into an unexpected predicament like a tornado or a pandemic or something that you are not prepared for,” Redmond said.
But, despite the risk of failure, UMSL’s Lauer, himself an entrepreneur, struck a note of optimism. Entrepreneurship may not be for everybody, but for those who get the itch, he thinks it is best to scratch it.
“What I like to say is that if you’ve got a good idea, test it out,” he said. “What you don’t want to do is be at the end of your life, 60, 70, 80 years old and say to yourself, ‘God, I wish I would have tried this.’”
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