Nobody ever started a business intending to fail. Yet, within five years half will. It's foolish to expect that all of these businesses could somehow succeed. Still, many successful and innovative businesses fail not because there was anything wrong with their product or service but rather because they fell into one of the pitfalls of success. So, how can you maximize the likelihood that you'll be in the right 50%?
There are seven potentially fatal mistakes that otherwise very successful businesses make. I've started, lead, or been a key part of businesses that have made every one of these mistakes--although, luckily, not all at the same time! I can tell you first hand that they are incredibly easy to fall into unless you've either been there or have someone who can warn you ahead of time. Well, here's your warning!
Not enough buffer--No businesses is immune to macro-economic cycles. Yet really great businesses get caught unprepared to deal with a slowing economy. The answer is not in trying to predict the slowdown but having the reserves to get through it. Have a doomsday scenario that will get you through at least one year of self-funding at half your current revenues. That may require cash reserves, a line of credit, a plan that details expense cuts, or a combination of all three. Credit is a wonderful thing but stay away from owner guaranteed obligations and credit cards. A succesful business needs to be able to fund itself in a responsible manner.
"Have a doomsday scenario that will get you through at least one year of self-funding at half your current revenues. "
Static business models--Entrepreneurs get attached to their business model; they get stuck in a certain way of selling and pricing. There's nothing more frustrating than an innovative company stuck in an old business model. As markets move you need to change the way you sell and monetize your products. For example, the shift from licensed software to the freemium model of selling cloud-based software that costs more with more functionality. I actually saw an add a few days ago from a small business that still had in its web marketing copy the phrase, "Call if you want our [product] on computer disks." Really? A computer disk? Is that anything like a cassette?
The Wrong Board of Directors--A good board can help you to make valuable connections, provide a sanity check on important decisions, offer objectivity that is not encumbered by your company's day-to-day issues. I've had and been on boards that made a world of difference, but I've also seen more than a few board members who are just out to make a quick buck. The wrong board will be short-sighted and self serving. Be leery of board members who have a greater interest in their financial stake than in the mission of your business.
"Be leery of board members who have a greater interest in their financial stake than in the mission of your business."
Overcompensating - This one is hard to grasp. It was for me. When one of my first businesses started to grow fast I had an exec on my team who felt that we needed to pay much more for new analysts. To be fair I adjusted pay for existing analysts. Years later I had a chat with a few of my old employees and asked them to give me some feedback on things I could have done better. I was shocked when they told me that they felt the move to adjust salaries was one of the most culturally erosive decisions I had made. Really? I wish I had read Dan Pink's book Drive--if only he had written it ten hears before he did! We get paid to work; but we don't work just for pay.
"We get paid to work; but we don't work just to get paid."
Inability to scale--This is one of the more perversely ironic paths to failure. I've seen companies that run like a well oiled machine for years suddenly choke on fast growth which strains their systems and people. Plan for growth. Invest in systems that will scale, use cloud-based computing, create training and mentoring programs to onboard new hires, don't skimp on internal accounting systems and staff, most importantly scale at a rate that your organization can absorb.
"...scale at a rate that your organization can absorb."
Outgrowing the Leader--Yes, this is the toughest one! Often the leader who started the business is just not the right person to keep it going five or ten years down the road. While there are many high profile examples of leaders who have grown with their company--Richard Branson, Larry Elison, Bill Gates--there are tens of thousands who have not. Ultimately you need to ask if the skills that got you to where you are will take you to where you want the business to go. If not, you need to either reconcile your personal and business ambitions or hire a leader for your next stage of growth.
"Ultimately you need to ask if the skills that got you to where you are will take you to where you want the business to go."
Reliance on one customer--This is a double edge sword. While I've bootstrapped businesses using the technique of a core dedicated customer, I'm always cautious of scaling a business too far with a reliance on just one customer. It's a false success and it makes you lazy in the areas you most need to be investing to scale, such as marketing, sales, branding, and innovation. It also creates enormous risk, not just because of the conventional wisdom that you're not diversifying enough, but more so because it makes innovation exceptionally difficult; you end up building a box for ideas around one customer, and that's a very tough box to get out of.
"...you end up building a box for ideas around one customer, and that's a very tough box to get out of."