If you’re an entrepreneur and you’re reading this, it’s likely that your venture won’t succeed. Stats show that 90% of small businesses will ultimately fail. And about half of small businesses don’t make it past the first five years, according to the U.S. Small Business Administration (SBA).
Entrepreneurs are typically more confident and resilient than the general public but optimism is no substitute for good business practices, market dynamics and access to capital. Yet despite the odds, many entrepreneurs still cling to their “baby” even when it’s apparent to everyone, including investors, that their business model simply won’t work. This is why it’s essential that you, as an entrepreneur, remove the rose-colored glasses and hold yourself accountable by making strong, non-bias assessments about the state of your business.
Consider the following:
1. “Failure” Is an Option
A study by investor Bill Gross finds that Timing (42%) is the top factor in startup success, followed by Team (32%), Idea (28%), Business model (24%) and Funding (14%). As the saying goes, “It’s all about timing.”
There are a host of failure points. For instance, you may believe that you have an innovative solution to a current problem. But your prospects may be unwilling to modify their current behaviors. Then there’s the issue of money. If your venture is bleeding lots of cash, that might be a hurdle that’s too big to overcome. Know when to fold so you can save your house, your savings, your relationships and your sanity. It’s not about protecting your ego, it’s about making sound business decisions.
Business icons such as Henry Ford, Walt Disney and H.J. Heinz went bankrupt at some point in their careers. They wouldn’t have built the empires they are famous for if they continually tried to resuscitate a doomed venture. There’s a distinction between persistence and foolishness. And if defeat is certain or likely, you should move on to another business that generates demand and will make you successful.
2. What Does the Business Look Like?
Is there a real business opportunity? Do you have access to working capital?
Be weary of ventures that appear like a small business when they arguably aren’t.
Let’s say you acquired a laundromat business for $150,000 and it provides you with $2,500 in monthly income. All you’ve likely done is buy yourself a job. Instead of your money giving you dividends and/or capital gains, all you’ve done is make money your boss. What happens when you’ve got to spend $50,000 to replace old equipment or fixtures? Take out a loan to finance your job?
Secondly, lack of access to capital is another reason why small ventures fail. Some business owners incorrectly believe that banks are the only source of financing when there can be alternative sources of capital that may not require collateral, writes Rick Nischalke, a business funding advisor. “In many cases, banks can have tighter restrictions when it comes to giving loans to small businesses and the terms can be highly unfavorable if your firm’s perceived risk profile is greater than what the bank would like.”
Pursuing a costly financing option is risky for your business.
3. Determination Under the Right Circumstances
It’s better to pick your spots. As legendary CEO Jack Welch said, “If you don’t have a competitive advantage, don’t compete.” There are market conditions that are beyond your control, and passion is no substitute for appropriate market dynamics. In other words, determination is a liability if you’re running in the wrong direction.
Are your potential customers repeatedly rejecting your product or service? Take the big hint.
If your product isn’t differentiated or defensible, or doesn’t add enough value, chances are that you’re delaying the inevitable if you plan on continuing operations. You need proprietary features, a proprietary process or some other wow factor to have a fighting chance against determined competitors. Don’t settle for commoditized products or services that everyone else can sell.
Finally, it’s essential to see reality as it is — not as you wish it to be. You’ve got to know how much you’re willing to risk, and decide when it’s time to cut your losses and move on to the next, and better, idea.