By Doug and Polly White.
Starting a small business is risky in any environment. The Small Business Administration reports that half of all startups will fail in the first five years. In economically troubled times, the odds of success are even further stacked against you. Yet, unemployment will lead many to launch an entrepreneurial venture. According to the outplacement firm Challenger, Gray and Christmas, almost one in ten people who secured employment in the second quarter of 2009 did so by starting a new venture. Most of these fledgling companies will fail, but some will thrive. Successful companies that were launched during recessions include household names such as Microsoft, Hyatt, Burger King, FedEx, Hewlett-Packard and General Electric. While conducting research for our book, Let Go to Grow; why some businesses thrive and others fail to reach their potential, we discovered some things that you can do to tilt the odds in your favor. Of course, there are no guarantees, but following these five tips will improve your chances.
1) Know what you want to get out of the business – The famous modern philosopher, Yogi Berra observed, “If you don’t know where you are going, you might wind up some place else.” A corollary to this piece of irrefutable wisdom is, “If you don’t know what you want, you may end up with something else.” The first step you must take before starting a business is to decide what you want and need to get out of it.
Do you need the business to throw off enough cash to pay the bills each month? Is short-term cash flow less critical but the objective is to aggressively grow the business and then sell it in a few years for enough money to retire? Will this be a “lifestyle” business―one you will enjoy, but not count on for income or wealth creation? All of these objectives can be completely legitimate reasons to start a business, but obviously, the paths that each will lead you down are completely different. In answering these questions, it is important to be brutally honest with regard to your economic situation, the time and energy that you want to invest in the business, and what emotional rewards you expect to reap from the enterprise.
2) Answer the most critical question – Every business owner must be able to answer one critical question, “Why should a prospective customer buy our product or service rather than a competitor’s?” If you can’t answer this question clearly and concisely, cut your losses and seek employment elsewhere. When times are tough, getting the answer right is even more important. You have to separate your business from the competition to survive.
Once you understand how what you offer is different, you need to make sure that the segment of the market that values what you are offering is large enough to support your business. You could market a skunk flavored Popsicle. It would be different. There is nothing remotely similar to this on the shelves of your local supermarket. However, it’s unlikely that enough consumers would value this difference for you to build a successful business. This is a silly example, but it makes the point that just being different doesn’t guarantee success.
3) Develop a robust business plan – You know what makes your product or service different and you’ve determined that there are enough prospective customers to support your enterprise. However, this, by itself, is insufficient. Whoever said, “If you build a better mousetrap, the world will beat a path to your door,” was just simply and unequivocally wrong. If no one knows that you have built a better mousetrap, people won’t be knocking on your door. To succeed, you’ll need a plan to inform your target market segment that you have what they want. You’ll also need to determine how you will deliver your product or service and how the business will be funded. In short, you will need a robust business plan.
4) Make certain that you are good at doing the primary work of the business – Most startups will be micro businesses―ones in which the principal does the primary work of the business. You may employ some people to help, but the preponderance of the revenue will come directly from your efforts. Obviously, you’ll want to make certain that you will be good at doing the primary work of the business. This may sound like remedial advice, but in our management consulting practice, we’ve seen far too many people launch businesses (particularly franchises) only to find that they are not good at and/or don’t enjoy doing the primary work of the business. It is critical that this assessment be made before sinking your life savings into a new venture.
5) Develop a plan for doing the ancillary work – While you must be good at doing the primary work of the business that is far from all you’ll have to do. If you want to bake cakes, don’t open a bakery. Get a job as a baker. The minute you open a bakery, you’ll find that there are many ancillary functions that have to be performed (e.g., keeping the books, ordering inventory, cleaning the floor, waiting on customers, paying bills, etc.). Don’t open a bakery because you want to bake cakes. Open a bakery because you want to run a business and you happen to have a good cake recipe. It is important for the would-be owner of a micro business to recognize that there are a lot of ancillary functions that will have to be performed.
Starting a small business is risky in the best of times. In a recession, the odds are stacked against you. Yet, some startups will succeed. Tip the odds in your favor by following the five steps outlined above.
Recent Doug and Polly were guests on the Price of Business, on which they discussed these important five points. Watch that interview in its entirety here.
Doug and Polly White are Principals at Whitestone Partners; a management-consulting firm that helps small businesses build the infrastructure they need to grow profitably. They are also coauthors of the groundbreaking new book, Let Go to GROW; why some businesses thrive and others fail to reach their potential (Palari Publishing 2011). The book explains how entrepreneurs can avoid the most common pitfalls as their businesses grow and is available at www.WhitestonePartnersInc.com