The stats are grim. Despite all the low-cost, information-sharing advantages of starting up a business in an Internet era, the Small Business Administration reports that roughly seven out of 10 startups will tank by the seventh year of operations.
What can all business owners learn from the common mistakes and oversights of failed business owners?
Based on my research on startup business failure, especially companies that tank within the first two years of operations, here are three missteps that always create extra stress and money loss for well-intentioned, hard-working entrepreneurs.
1. Test ideas on friends. I wish I had a dollar for every startup entrepreneur who has said to me, "You are the first person to ever tell me about this problem. All my friends loved my idea."
One way or another, an entrepreneur's target customers — not best friends — will determine if a startup idea is really a good business idea. Why not talk to customers before investing in big production runs and advertising rather than after? The best way to avoid costly errors in product or service design is to test and tweak and then test and tweak again.
2. Stiff Uncle Sam. In startup and fast-growing companies, it's natural for entrepreneurs to allocate their cash resources to initiatives that will attract more customers or boost profits. When faced with a pressing, time-sensitive decision to put more funds toward business building initiatives or pay tax obligations, too often entrepreneurs pay their vendors instead of Uncle Sam. Smart choice? Not at all.
Nothing can overwhelm an already cash-starved business more than a quarrel with the IRS. Vendors don't have the power to go after the personal assets of a company's officers and directors for unpaid bills. But the IRS often can. And if a company doesn't pay its payroll taxes, sales taxes, franchise taxes, property taxes or income taxes, then interest and penalties will make the day of reckoning even more painful. Certainly, entrepreneurs should take advantage of every legal deduction to minimize their tax obligations, but they have to pay ontime in order to avoid paying more later.
3. Invest too much. Investors know that there is a subtle but meaningful distinction between a successful company and a successful investment. A successful company can pay its bills, earn a profit, and serve customers with a high degree of professionalism.
A successful investment, however, is ultimately based on the ease in which business founders and investors can cash out at a price that is well above the amount of savings they invested in a small business — even if it is years down the road.
Just because entrepreneurs may invest $10,000; $100,000 or $500,000 of their personal savings in a business, doesn't mean that their beloved companies will be worth that much or more to other business buyers or investors in the future. It's shocking to entrepreneurs and their family members when they realize they have over-invested in their companies and may not ever get the money back.
There is a better way to position your company to one day earn a positive financial return on your invested savings. It starts with a determination to "to buy-in low in order to sell high." The second step is to learn what types of customer relationships, intellectual property, financial performance and other strategic initiatives are rewarded at the time a company is sold in your industry. Once you know these points of "value" then you can fine-tune your company's operating strategies year-after-year to improve the overall value of your business.
It's a popular notion to say that getting a new business off the ground is "hard." I agree it is hard when entrepreneurs have to stop to correct avoidable mistakes, and then start all over again.
I like easy. Test your ideas with target customers; pay your taxes on time and don't over-invest in your company. These initiatives can help make the job of business building, more fun and lucrative. You can do it.
Susan Schreter is a 20-year veteran of the venture finance community and entrepreneurship educator. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.