90% of Startups Fail in the first 5 years. Here’s how to beat the odds
Previously I blogged on Consistency pays: how I learned to code, built a million dollar software business in my spare time. It’s a compressed version of my story as going from unemployed graduate, to learning to code, to successful software business owner, but I had to leave out a lot of detail to make a short readable article!
A lot of people want to start a business, or go-solo. The freedom, the opportunity for growth, earning potential are among many of the reasons people choose to do so. But have you heard the statistic, 90% of businesses fail? It’s a terrifying statistic and something you want to avoid. There is nothing worse than putting in years of your life, possibly capital from friends, family or savings, and losing it all… If you want to avoid this, I’m going to tell you my experiences on how to beat the odds.
Build something that doesn’t require much capital
We all hear about the billion dollar startup that raised 5 seed-rounds of investment. Big dreams require big capital, for example Uber has raised and spent tens of billions in capital, SpaceX, Tesla billions and Facebook had loads of startup capital too. However, you are probably not Elon Musk or Mark Zuckerberg, and if you are, thanks for stopping by!
Have you thought about bootstrapping a business?
This is the process of starting a business without much capital and only re-investing what it earns. For example, as a newcomer to business without any startup capital I couldn’t build a car factory or start a Hotel, but I could become a freelancer, a blogger, writer, start a small business as a tradesman, or learn to code and create a software product as I have.
Here’s how I did it:
- Day 1, start a business creating a software product.
- Build the software product in my spare time.
- Bring it to market fast and see if anyone wants to pay for it.
- If they do, listen to product feedback, re-invest the capital back into the business, for example by hiring, spending on advertising and marketing and further product development, into areas where it can grow.
- Rinse & repeat until you achieve success!
(This part requires a 200 page book to expand on!)
Or, for a less technical business such as in the building trade, you could:
- Start a business as a builder or sole-trader.
- Pitch for work, get a job and hire two labourers to help you
- Complete the job, re-invest the income back into the business.
- Build a website, business cards, and start to advertise.
- As revenue grows, hire more labourers and more skilled workers and eventually you can reach the point where you have teams of builders working for you and large revenue.
These are just examples and not a prescription on what business to start. My point is, if you have little capital, start small and grow organically.
Build something that people actually want, and will pay for
This sounds obvious but hear me out. When starting a business, no-one knows how successful it’s going to be. You need to sell something that people actually want.
How do you know what they’ll want?
By building something quickly, and without great cost, and testing the market, you will know if people want a product or not. It’s a mistake to spend 5 years building a product or service then launching it to a big fan-fare, as you may get absolutely no sales …
By using an iterative, bootstrapped process you get feedback early. People will tell you what they want and vote with their wallets. It’s the willingness to pay which should be your guide, as this is far more insightful as to whether you’re meeting a real need than anything else.
Q: Can you think of a way of getting an idea to market fast, or cheaply to test it out? If not, what changes would you make to the product or the process to make a less-complete version more quickly?
Build in an area that you have passion, and understand
Growing a business requires a marathon-like mindset. It requires you to dig-in for the long haul. It’s easier to do this when it’s something that you love, are passionate about and have a lot of knowledge and understanding about.
Ask yourself:
- What are you good at?
- What are your passions in business?
- What’s your best and most marketable skill?
Your business idea or product/service should overlap with your passions and skills, and by focussing on the areas where you can add the most value, you give yourself the best chance of success.
The willingness to pay should be your guide
Throughout my own journey growing a business I’ve heard so many people say ‘if you only add this feature to your product, I’ll buy it’ or ‘lots of people will want to buy it’. Honestly, they could have the best and most honourable intentions, but the willingness to pay speaks volumes.
If a customer really needs your product or service, they may be willing to pay a deposit or down-payment before you’ve built it. Or, they may be willing to pay for the product as it stands with the agreement you will steer the development in their direction.
As the old phrase goes, ‘talk is cheap, but money talks’. Ask questions to the customer and say things like ‘we’d love to go in this direction but we’re not sure of the demand. Are you willing to accelerate our roadmap by making a down-payment?’
In my experience most say ‘no, that’s not in our budget, sorry’, but some have said ‘look, we really need this, we will help you to make it become a reality’.
These customers really need what you have and you’ve just stumbled upon market fit simply by listening to what the customer is willing to pay for.
Spend as little capital as possible, watch the money very carefully
A friend of mine used to say, ‘a business which doesn’t make any income is a hobby’. Well, similarly, a business which spends more than it earns is not a good business!
Some things to think about when building and growing your business:
Do you really need that swanky office, that company car or that top of the range MacBook? Do you really need that new hire? Can you automate the task or learn to do it yourself? Do you really need to spend so much on facebook ads? etc…
My first business I created a profitable product on a not-very-exciting second hand Dell laptop on the commuter train to London.
- I had no office and still don’t
- Instead of ads I focussed on creating content, search engine optimisation and grew sales by word-of-mouth by doing a good job.
It wasn’t the done thing at the time (no office) but now in the age of Covid19 suddenly everyone is clamouring to create work-from-home culture and I somehow look like a visionary :D
Q: How can you optimise your costs so they are below your income? Way below, if you can, to create as much profit for re-investment as possible…
Re-invest profits but never go all-in
To grow your business you will need to re-invest profits. Many people borrow, I would not recommend doing that unless you’re willing to take the risk that you may end up paying that debt yourself after a business failure, especially given the punitive rates of small-business loans…
Ideally, you want to make a profit and re-invest the profit back into the business, either by hiring, spending on advertising/marketing or investing in new products or further development.
However, you rarely, if ever want to go all-in.
Consider that at any time your business could struggle, due to a bad patch, bad economy, a recession, a strong competitor or just market forces beyond your control. By either storing up a capital buffer, or withdrawing profits and diversifying you are giving yourself the best chance of success and increase the odds of riding out any storms which may come your way.
Don’t draw a salary as long as possible
If this is your first business or your tenth, not drawing a salary keeps the costs low and gives you the best chance of success. This is what I did when I created a business from scratch in my spare time: I worked a main job and partitioned by spare time to be able to build a software product outside of work. It was three years before I drew a salary from that business, and all the income from product sales could be re-invested to help it grow.
By delaying taking a salary, you give your business the best chance of success.
When you do draw a salary, keeping your personal expenditures low means there is more capital available to re-invest into the business, again increasing the odds in your favour.
What to do if you’re not getting any sales
If you are not getting any sales, something is wrong!
- Either there is no desire for the product
- Or people haven’t heard about the product
Usually people think (b) is the problem and invest in advertising and marketing, but this can be very expensive and result in more disappointment. Finding the product-market fit is the most important thing and sometimes requires a mixture of market-knowledge, luck, ingenuity, and testing.
Takeaway points
- You may have many business ideas, what about trying out a small cut-down version of the best one or two?
- What about making many successive small changes and seeing which get the most interest or create the most buzz? The one where you get the biggest initial response is the one to focus on your time & investment on…
- Build on that and watch the profit & loss carefully and you too can grow a successful business.
Follow me as I continue to document my journey about wealth creation, investment, software development and business growth. You can find me over on Twitter as DrAndrewBT.