Starting a business is very risky. Even though failure rates have steadily come down since the Great Recession, a new business is more likely to go under than thrive. If you're in financial services, your chances of success are as low as 42%. If you're in retail, your chances go up, but just slightly.
It may come as no surprise but the reason behind the failures rarely has to do with neglect or outside disasters. Almost all the time, it's because management is incompetent. Reasons range from a founder/CEO going into a business for all the wrong reasons (ie just to make lots of money only) or overspending or a total lack of focus.
So how do you make sure you're starting your business on the right foot? Below are five critical things every CEO of a new company needs to know:
1. Better to be alone than hiring the wrong team: When you start a business, you need to have a strong team around you. The problem is founders become so desperate for a team to prove they have a viable idea that they often rush into hiring co-founders. Chances are you're better off staying alone until you find the right person or persons than hiring the wrong person just to have a warm body next to you. Whatever is bothering you about the person off the bat is going to get even worse, not better. (For more on how CEOs manage staff, listen to our latest podcast episode featuring renowned global thinker Mohamed el-Erian. He talks about "strategic yelling" as a management tool. Click here.)
2. Sitting on a product too long: I recently had the chance to host a lunch for Eric Ries, the bestselling author of The Lean Startup, whose basic theory is businesses have to test and test their idea or product before it's fully ready. Conventional wisdom suggests you should research and hone your product before fully launching it; Ries' argument is that you waste valuable time on a product that might not even fit the market. Your best bet is to test the product out first on customers and get the feedback, then use that feedback to refine your product. While his method doesn't guarantee success, he says it will certainly guarantee fewer failures.
3. Overspending/Underspending and not knowing the difference: Unless you're a Wall Street firm with outside facing business, forget the fancy office. A few desks in the beginning will do. However, having a great looking logo or premium-looking website is a must. CEOs have to understand where to spend and where to keep costs low. That fancy foozball table just to make your employees feel like they're working for a cool company? Forget it.
4. Keep your board small: This really applies to founders who've sought outside funding. Scott Kurnit, the founder of About.com and Keep.com, says no startup wants to or needs to start off with a big board. You may think it looks impressive but it will inevitably become a headache. Scott's half-kidding but real advice is to find a friend with low net worth and put him or her on the board-that way, if the company one day gets sued, nobody can claim a significant reward from board members. The CEO should always be on the board but not the co-founders; that leads to very awkward and uncomfortable situations later.
5. Establish your culture early: Culture is not a feel-good thing you should do; it's a thing you absolutely have to do. A company culture is vital to the success and well-being of your growing staff. It's critical for hiring talent and it also forms the foundation by which the founders interact. Scott established a culture very early on and you can read it here. There's also the famous Netflix slide on culture that has inspired many companies, including my own.