Much like birth, death, or catching a fly ball—starting your own business only happens once in life. But unlike those other scenarios, you can be bad at building your own company—really bad.
In fact, according to researchers at the University of Tennessee, about 50 percent of all businesses fail, and 25 percent close their doors by the end of year 1.
Which means you want to make sure you minimize your mistakes in order to increase your likelihood of success, so that you end up on the positive side of that statistic.
Is there a blueprint that guarantees success?
Of course not.
Plenty of the best minds have struggled in their business ventures—but they were smart enough to recover in time or they received the rare second chances. We don’t like leaving things up to chance.
We’ve started our own businesses—similar and yet different in nature—and have used the following tips to achieve some success. Learn from our lessons, and even more so our mistakes, so you can embrace your entrepreneurial spirit, become your own boss, and reap the rewards of your time and investment.
Don’t Chase Money, Chase Your Talent
Gary Vaynerchuk is famous for saying that we have too many “wantreprenuers” and not enough entrepreneurs. That is, there are lots of potential new business owners looking into starting a business based on what might be profitable or appears to have the easiest path to success.
Who cares if car washes turn an incredibly high profit margin? If you don’t care about cars or washing them, this will not be a venture that is likely to succeed no matter how many dollar signs you see in the competitive set.
Research shows that the amount of money you make is only correlated with happiness up to a certain point. If you’re looking for a hard number, Princeton University researchers said about $75,000 makes people happy and beyond that you don’t need a significant different.
In general, research suggests that as long as you can satisfy your basic needs (think food, home, the occasional getaway), you’re going to be happy, meaning the conquest for a bigger bank account will only provide so much motivation.
This is important: If you’re looking for a get rich quick scheme, then you’ve identified the wrong motivation for starting your own business. Much like money, any business will be able to sustain you up to a certain point, but it won’t fulfill you if it’s not something you enjoy.
Whether it’s gardening, laser tag, or opening a gym, you want to focus on a business that you’re truly passionate about. That passion will help fuel all of the other risks you have to take (as you’ll soon discover), keep you plugging away during the hard times, and make it easier to determine a long term plan for growth.
That said, just because you love doing something doesn’t mean you should be doing it for a living. It’s not always possible for everyone who loves a given field to come in and start a business. You must first determine if there’s space for you idea, or if you have a concept that fulfills a gap in the marketplace.
Innovation or Iteration: Both Work
In general, you can determine if your business has a chance for success by identifying one of two routes:
- Is there room in the market for something new and innovative?
- If there’s not room, are you providing a good, service, or advancement that improves on the current model, makes a proven service better, or simplifies the process for the user?
Room in the market means there’s currently a growing demand or surge in the product or service. A great example is craft alcohol, such as beers or ciders.
In the past 10 years this market has experienced a rapid boon. And as a result, more people interested and willing to spend money on smaller brand products.
You could hypothetically open a bourbon distillery because there’s room in the market for growth. Or maybe you could focus on gluten-free alcohol because right now it’s all the rage. Whatever the focus, when you identify a new trend that is successful, your opportunity is to build a business that has some legs.
This comes with a big caveat: Following trends is a slippery slope for a startup company. You want to make sure you’re investing in a field that won’t disappear in its entirety.
Alcohol is a good example because people will always drink. In fact, it’s one of the few recession-proof businesses. When people are down and poor, they booze away their sorrows. When they are happy and celebrating, they buy a round.
Your other approach is finding a hole in the marketplace.
This typically occurs when you have a high level of saturation in a line of business, but a new idea either finds a way to address a problem or supplies a better solution to what is currently being done. A great example is Uber.
There’s definitely no shortage of cabs or car services in any major city. But Uber put the power of getting access to a cab directly in the palm of your hand on your mobile device.
You want your ride when you want it, and now because of Uber you can have it without having to hail a car with hundreds of other people. Uber is a perfect example of finding a better way to provide a service that you already know people want and need.
Create You Model: The 7-Step Process
At this point, you’re close to determining if you can start your own business, but building a model is where success can be won or lost. Great ideas are common. Great execution is rare. To build your model, you must answer seven very important questions.
Question 1: What does your company offer?
This might seem like a ridiculous question, but it’s the most important. Your vision must be clear and intuitive. Your focus can change over time, but if you’re to acquire customers and make money, you need to know what you’re offering.
Too many companies fail (90 percent according to one study) because of a lack of managerial experience and a lack of clear vision. You should know what you offer and create values for your company that are reflected in everything you do.
Another very important point to consider: Your plan should have a long-term vision. View your business like a television show. Some shows have incredible concepts, but it feels as if they wrote the treatment for only 1 season (we’re looking at you, Heroes.)
Your business is the same way. You need to assume your business will make it past year one and have projections for other areas of growth, expansion, or new products that you can add for longevity. If you’re going to invest in your plan, make sure it has a vision.
Question 2: Is there a need or interest?
We live in a technologically advanced era, and there are more resources at your disposal than ever for you to succeed. However, there’s no need to reinvent the wheel of what people want. If this is your first business, make sure that your idea or service add value to people’s lives. The best idea in the world might sound awesome, but if no one cares then your great idea will lead to plenty of headaches and lots of money lost. Leading to question three…
Question 3: Who is your consumer?
As you’ll soon find out, this is rule #1 for your marketing and promotion. The more you understand your user, the better your business will be. Make this as concise as possible.
Your vision and audience can grow, but early success will be determined by your ability to dominant a marketplace or vertical category within your field.
Question 4: Determine a Startup Cost
This is an area where so many fail, and if it wasn’t for some luck, it might have crushed some of our businesses.
You need to have a plan for the amount of money it takes to launch your business and sustain your plan. As a rule of thumb, it’s always better to overestimate rather than underestimate.
Do you need employees?
Do you need financing?
How much capital will it take to build a prototype?
These are all questions you must ask. All businesses end up being more expensive than you think. And just when you think you are done, you need to buy insurance, have liability coverage, and protect your assets. Be thorough and consider all angles because there are many hidden costs.
Question 5: How will you make money now?
You don’t have to be profitable right away, but you should have some idea how you will sustain the business and get by as you start your company. The answer might be a loan or investment, but before you press “go” on your idea, you need to ask yourself how you’re going to survive.
Question 6: How will you make money in the future?
As we said before, don’t assume you will fail. Assume success and growth, and plot out exactly how that will happen and when. This will be especially important if you look for investors.
Question 7: Did you set deadlines?
Procrastination kills businesses in so many ways. A very easy way to avoid that trap is to set deadlines—lots of them. Set a deadline for when you must order goods, hire a web designer, build a first prototype, and launch your company to the world. This is your business, so it needs to be run like one. Clarity and focus will increase your likelihood of success.
Funding your Business
You could probably write an entire book on funding a business (and many have). So it’s not so much about determining how you find the money (you have many options), it’s determining the best route for you.
Option 1: Bank Loan
The Pros: You get money to start your company and are forced to put together a comprehensive business plan in order to convince the bank that you are worthy of the loan.
Cons: You owe money and interest. So if your business fails, not only have you lost your source of income, you also need to find a way to pay back the bank.
Option 2: Credit Cards
The Pros: If you have great credit, you can probably qualify for a business credit card. This is probably the simplest route and the least hassle.
Cons: With great ease comes great risk. Tying up credit card debt to your name could have a crushing impact on your own personal credit and sometimes throwing everything on credit draws attention away from just how much you’re spending. Plus, when you add in the interest rates, it could become a surprisingly expensive venture.
Option 3: Find Investors
The Pros: You receive information from (hopefully) smart investors who are determined to see your company succeed. You receive money, help, and support for your business.
Cons: Whether it’s a VC fund or an angel investor, these people aren’t giving you money for nothing. They want a piece of your company in the form of equity, revenue share, or both. And sometimes—depending on how much startup cash you need—they might be asking for more than you’re willing to give up.
Option 4: Crowdsourcing
The Pros: You can thank the Internet and companies like Kickstarter for finding new ways to help businesses. If your campaign is successful, it’s almost a dream scenario: you get your money and own all of your company
Cons: That’s a big “if.” If you don’t raise the money you asked for, you don’t get any of it and you’re no closer to starting your business. Or, if you set your bar too low, you start out with not enough money and only create more problems down the road.
Option 5: Invest in You
The Pros: You own all of your company and are liable to only yourself. There’s no debt if you pull your money from your own pocket.
Cons: Starting a company can crush you financially and take you from a stable life to a very difficult one. As with most things in life, you must determine if the juice is worth the squeeze.
What’s right for you?
If you are completely uncomfortable with anyone owning a part of your business, then looking for investors is not the best option. Which means you either go to the bank and owe more money (not our preference), or dig into your own savings.
How much, you ask?
This is highly personal and based on your risk-aversive behavior. In general, we wouldn’t suggest spending more than 50 percent of your savings on your business. However, if you are a risk-taker—meaning your ability to focus and work is not negatively impacted by the risks you take—you are free to spend as much of your money as you want.
The worst thing that can happen though is that you’re focused on making the money back rather than investing all your energy in making your company succeed.
And if you’re afraid of spending your own money at all? Well, if you won’t spend on your business, then why would expect anyone else to do the same? So you should stop right there.
Always remember, “Scared money don’t make money.”
Bringing Your Business to Life
When it’s all said and done, you have your vision, a model, and capital, it’s time to make some money. You have many options, but they essential boil down into three categories:
- Public relations
- Paid marketing
- Free marketing
Public relations is hit or miss. You can hope that the media decides to share information about your business, but it usually follows the footprint and noise left by marketing buzz.
The paid variety is everything from old school billboards, ad space, and buying online media, such as placement on Google or Facebook. Free media is referral traffic from people talking about your business or sharing their experiences.
This is where social media has changed the game for small businesses. Word of mouth and referral business is still one of the most successful routes for any business. If your friend tells you to go try out a new product, you’re probably going to try it out. Social media is the new word of mouth. Which is why when you build your business model, it’s essential for you to identify your endemic, target audience.
The more you know your user, the more you can target them and become a customer. Once you have the biggest influencers of your target demographic, then you can start reaping the benefits of your hard work.
But remember, social media works both ways. Just consider the restaurant business. A few bad reviews on Yelp can easily crush a new spot that has opened.
Which leads back to the most important part of all new businesses: If you’re making something new, make sure it’s great.
If you’ve done that and you’re able to appeal to customers, as the old saying goes, the cream finds a way to rise to the top.