The failure rate for small businesses is very high.
I’m told that 80% of start-ups fold within 18 months. I don’t know if this true for South Africa, but it sounds about right.
The popular narrative is that this is a fundamental reality of capitalism and that, therefore, if you fail, it’s not your fault.
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Don’t shift the blame
We’ve all failed and there are indeed times when this was out of your control, but for the most part, as comforting as this is, absolving yourself of blame for your business’s failure unfortunately is simply a sop.
You will be told to follow your passion and that this will be the elixir of success. But you can’t pay suppliers, lenders and employees with passion. That takes cash and cash comes from one of two places: Customers who want what you’re selling or investors who think that customers are one day going to want what you’re selling.
Passion won’t pay the bills
Logic, fundamentals, data, market analyses, competitor intelligence; these – and not passion – are what separate businesses that work from those that will get their owners ever deeper into debt before dumping them a year or two down the line, bruised and battered and hopefully a bit wiser.
Don’t get me wrong – Passion is nice; it’s good to wake up and feel excited about what the day is going to bring. But unless you can do what you are doing better and, preferably, cheaper than your competitors for customers who want and need what you are selling and can afford to pay enough for you to eventually make a profit, you are going to go out of business.
It’s as simple as that.
Run the numbers and test assumptions
When I look at a business plan with a view to investing, I will look at a range of things, including who the entrepreneurs are and why they think they are equipped to run the business, but the most important factors I take into account are the pricing model and the market. Do you sell what you make or do for enough money to pay you and your staff enough to stay committed?
So how do you avoid making bad decisions?
Most importantly, as I’ve already said, run the numbers and test (and re-test) all your assumptions. Experiment. Speak to suppliers, customers, competitors, mentors and friends. Can you realistically make a profit, over the long term, doing what you plan to do? If not, do something else.
A major part of this, is knowing who your customers are and what they want. Don’t assume they want what you want to sell them because it’s what you would want. And don’t bet on them being willing to pay you enough to make the business sustainable.
Test all your assumptions. Gather data. Walk in their shoes. Check what else is out there.
Have something special to offer
Your customer is the cornerstone of your business, and it is only by talking to them and finding out what they want and how they want it that you’ll win them over. Without them, the war is over before the first shot gets fired.
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Finally, have something special to offer either in terms of product or cost. If you can’t invent a new mousetrap, make a cheaper one. If you can’t add value to your customer’s life, they won’t be your customers for long. And when you have to value proposition, communicate relentlessly using every channel at your disposal.
Nothing beats clear, concise, targeted communication.
At the end of the day, you’re in business to make money and your investors are backing you because they want a return. Business should be fun and there is nothing fun about being part of the 80%.