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The Deadly Mistakes Entrepreneurs Make
A large organization can make a large mistake but their momentum will
carry them past it and their reserves will patch up the damage. When a
smaller entrepreneurial business makes a big mistake, it’s frequently
enough to kill off the business. Here are six big mistakes entrepreneurs
have made that proved fatal:
1. Share-of-Market Revenue
Projections
It’s relatively easy to calculate how big the market is for a particular
product or service. Many start-ups base their projections on gaining a
certain percentage of that market, but that’s the wrong way to go about
it. A new entrant into an existing market starts with zero and has to
build up its share one sale at a time, often having to grow the market
to survive. Those already in the market have a significant advantage and
won’t give up their revenues easily to a new entrant.
2. Basing a Business on ‘the Big
New Idea’
If you’re entering a marketplace where you’re certain there’s no
competition you’re probably heading for a tough time. Be honest and
admit that most areas of business have been explored to some degree,
often to the point of extinction. Having just one idea to put in play is
a ‘life or death’ scenario, and given the 80% failure rate for start-ups
it’s almost a guarantee that the business won’t make it.
3. Starting a Competitor While
Still Employed
Many employees suffer an entrepreneurial seizure and convince themselves
that they can start a similar business to the one that’s employing them
and do it better/make more money, etc. There’s only one problem and
that’s when the current employer finds out about it and gets a good
lawyer. In most legal jurisdictions an employee can’t start up a
business that competes with their current employer, nor can they use
proprietary knowledge or trade secrets from their current or former
employer to start a new enterprise without risking a very expensive
lawsuit.
4. Starting a Business to Serve
a Key Customer
The entrepreneur in any salesperson will instantly respond if a key
customer says something like: “You know, if you could get a supply of
widgets I’d buy all of mine from you directly and you could make all the
profits your boss is now getting”. It might sound like a goldmine but
it’s placing the start-up on a dangerous footing from day one. It might
work for a while but unless the business quickly adds other new
customers it becomes vulnerable to any changes in its relationship to
the key customer. Any business with a single customer that represents
80% or more of turnover is in trouble – but may not yet have realized
it.
5. Excessive Optimism
Entrepreneurs have to be optimistic but they also need a good dose of
realism when doing their financial calculations. Failure to consider the
downside risks can bring the business to a halt quickly. If a start-up
expects to have its product on the market in six months and have sales
growing at 20% per month for the next six months with a gross margin of
70% the numbers may look rosy. But when it takes ten months to bring the
product onto the market and growth runs at 10% a month on a gross margin
of 40% the cash flow figures will be a disaster – and most
entrepreneurial businesses have no plan whatsoever for such variances.
They fail not because the idea was necessarily bad but more than
anything because their forecasting is poor and the capital dries up.
6. Letting Sales Drive Expenses
Rising sales are a trigger for many entrepreneurs to add personnel, get
a better office, buy new furniture and replace those old PCs. The
break-even point of the business starts to climb as does the cost of
fixed overheads, and that makes the business much more vulnerable to any
downturns that may occur. Successful entrepreneurs see their businesses
grow but limit expenditures to those that pay a return – non-productive
spending is still curtailed. Save that for the big public companies who
are spending other people’s money and think it’s alright to waste it.
These mistakes are six of the best, but they’re by no means a
comprehensive list. You can add such other causes as failure to get (or
follow) legal advice, hiring people without checking them out first,
ignoring industry benchmarks, and really believing the world beats a
path to the door of a company with a better mousetrap.
Thanks heavens for entrepreneurs. Thanks especially for allowing so many
to survive despite the horrendous – and often fatal, mistakes they make
when they bring exciting and untested enterprises into the marketplace.
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