Why New Businesses Don't Succeed
Updated: Apr 16
So you’ve decided to launch your own business! Assuming you’ve done your homework and diligence about your product or service, you may already recognize that this understanding is only a parcel of the knowledge base you’ll need to acquire to make your vision become something tangible. You’ve read reports like the Harvard Business School study that indicate that somewhere from 50-75% of new companies won’t see their 5th year anniversary, so you recognize the odds are quite literally against you.
Owning your own business and the lessons that come with it are the opposite of your school education; you get the test first, and the lesson after. Since you’ve made your decision to do it despite the risks, how do you go about minimizing those variables that cause failure? Let’s look at some of those reasons and consider some countermeasures.
Lack of Business Knowledge – Knowing your product and client profile is only the beginning. Understanding operations, finance, marketing and the communication skills needed are often lacking for a new business owner. It is important that you have access to resources that can fill in the blanks to help you grasp concepts such as revenue cycle management, projecting cash flows, creating healthy metrics to determine what your targets should be, and understanding taxes and asset protection, among many other topics.
Lack of Mentorship – you may be in business for yourself, but that doesn’t mean you must be BY yourself. You may have support from well - intentioned family or friends, but that may or may not be helpful from a mentorship standpoint. Oftentimes, mentors should be chosen on the merits of their experience or credentials; and an objective viewpoint, without your emotional attachment to your business, is a healthy perspective that will help you avoid having blind spots in your business plan. Incorporate some mentorship that brings relevant experience to the table, so you have a sounding board and can fire - test your ideas.
Overconfidence – The most expensive thing you own is your ego. When a business owner falls in love with their product (as good as that is in some ways) they may not correctly assess its value in the marketplace and therefore price themselves out of a competitive environment. It is also important to stay humble and not assume you know everything; this mistake closes you off to taking advice or embracing change. A business owner must be a perpetual student of the industry they are in; let your confidence be the gas that keeps you going and makes others want to do business with you, and let your humility keep you in a learning mindset.
Poor Choice of Partners – “A friendship founded on business is better than a business founded on friendship”, says John D. Rockefeller. Picking partners based on the fact that you are friends is a common recipe for creating difficulties in a young company. Friendships can exist very well on some common area of interest alone; but business partnerships require a higher level of shared interests and above that, higher standards. An alignment of vision, work ethic, and willingness to learn, to submit egos, and at times disagree while still finding ways to move forward responsibly. And remember - in all healthy organizations, dissent takes place face to face.
When a new business requires partners, it is important to establish an operating agreement to clearly define the partnership and govern the relationship. The more thoroughly things are delineated in writing, the better the document protects all parties. Define the roles and responsibilities of each member of the team, and have them ‘proof up’ why it is they share equity in this new company. How is each partner earning their share? Such a conversation can be a bit awkward at times (you are at this juncture representing your own interest first so you can come together and create the company), but it is far better to do this at the beginning rather than proceeding based on assumptions, only to discover later on (often through inefficiency or failures) that certain members of the team didn’t know who was responsible for what. It is also wise to have a document to point at, in terms of disagreements, rather than pointing at each other!
Lack of Drive – You can’t steer a parked car, and at the heart of any business engine is the drive of the owner(s). Running a business is a combination of head and heart; you need solid logic, diligence and metrics to make business decisions, but logic alone will not always sustain you when things are difficult. Your passion and drive for your brand is the force that underwrites your ability to persist when the going gets rough. It can’t be taught. Your business is your personal expression of a value you want to bring the world; is that value high enough for you to stay resilient? Only you can answer that.
Internal vs. External Factors A lot of the discussion around the ways to mitigate these risks are broken down into internal versus external. The internal side revolves around the mindset of having passion and drive, patience, having the right expectations, correctly gauging your market and how to access it, keeping egos in check, a hunger for learning, resilience, a nimble thought process, and knowing when to pivot and not be rigid in your approach. Some of this you can read about to learn, and some you’ll learn by doing. The entrepreneur is willing to act on incomplete information (when the situation doesn’t allow for complete data), with the understanding that they will need to pivot and respond to the scenarios that result.
Consider the model of drug companies that take new medications to market. The research phase and clinical trials take years and cost billions; and a majority of the drugs that start these trials fail out. But others take their place, and despite the huge costs, a measure of high failure rate is expected and factored into the development. While an extreme example, all businesses must learn to embrace the usefulness of failure as a sharpening tool. If you learn to use failures as a means to adjust, it is no longer a feared outcome.
The number one external factor to minimize risks is proper mentorship. It eliminates guesswork inherent in the inexperience of a new business owner, and the costs that are associated with bringing on good mentors are often far lower than the price of learning the lessons yourself. Ask a business owner that has ever lost their company, what they would pay for the experience without having had to do it themselves.
Serious drive and a student’s mindset coupled with the right mentorship is a huge advantage for a startup business. Mentorship isn’t about someone telling you to go to the gym; it’s the trainer who meets you there and says, “here’s what needs to be worked on today”. The decision to show up or not needs to already be made. Remember that most mistakes can be recovered from – with the exception of never trying.