Most of you know that the majority of small businesses fail in the first five years of existence. Reasons that come to mind are that they were not properly capitalized, couldn’t generate sales, and the like. However, did you think that growth could also be a harbinger of doom? Well, excess growth beyond your ability to service it is what we are talking about. Heed this warning and the others that follow as signals to sound the alarm.
Fast Growth: As mentioned, growing to quickly can be deleterious. Everything from not having enough product to meet demand, to having too few employees to help you manage will give you a heads up you need to act quickly.
Your Equity is not your own: Mark Cuban is a stalwart in noting that a start-up should only borrow from others when it is needed, because a big chunk of your equity will disappear for probably less than what you would like. Speaking of the money of others, did you know that 70% of lottery winners go bankrupt! Perhaps the biggest sentiment here is that if you didn’t earn it, you will likely lose it. Bootstrap as long as you can and try to grow through organic earnings. You will feel the success of hard work, as opposed to playing with someone else’s money. According to the SBA, most small businesses actually start with less than $5,000 in capital.
Media Exposure: This is one of the cogs in the wheel that will accelerate you forward, but be careful of how much attention you get. It leads us back to our first issue of not being able to manage growth. Especially in this tight labor market, if you had to hire on the spot to meet new demand, it could be difficult.
Target Market: When you think about marketing, there are essentially two main approaches, one is shotgun, and the other is targeting. Many new businesses will attempt to cater to everyone, although only a very small percentage of the people are interested. I would rather have a successful niche business than a commodity type where your expertise adds value to the product.
Business Plan: In my opinion, you need to have 2 business plans. One for external use for creditors, banks, and other lenders, and one for internal use. The external plan would be one that you would expect to be longer and more financially detailed. However, this plan typically will not help you run your business on a day-to-day basis. As with a resume, come up with a concise, one-page plan that you can look at each day that will allow you to stay on course. Things like cash flow, sales targets, and other shorter term metrics that will be more useful to you in daily operations.
Dynamic Business Model: Often times, you may have to tangent away from your primary model as circumstances change. Be flexible with this and don’t be afraid to deviate. I worked with a start-up several years ago. Their business model was essentially to do oil changes on cars at home, work, wherever. It did okay, but I had a feeling they were going to have to deviate somewhat from it. I spoke with them about a week ago, and sure enough, they had segued into a slightly different realm, allowing them to keep the doors open.