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Start-up Advice

6 Costly Mistakes People Make When Starting a Business

Here are six pitfalls to look out for, along with expert advice on how to avoid them.

Lorie A. Parch

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Like every start-up entrepreneur, Rodney Nelson needed a great website. Woolly Pocket, the company he was building with his brother, Miguel, aimed to sell its cleverly designed, eco-friendly wall planters online. But there were problems.

“Our first site didn’t follow the standard design protocol of a good website,” remembers business management consultant, Nelson. “It was difficult to navigate; customers had to scroll all the way to the bottom of the homepage and then to the next page to find ‘buy it now.'”

The brothers moved on to another developer, but their second e-commerce site didn’t work well either, and they found it hard to get the tech team to respond quickly. “The initial rate was affordable, but we had to redo it maybe six months later,” Nelson says.

“The second time it cost double; we were happier with it, but we weren’t ecstatic. Then we went to another company about a year later. We did three websites in one year. In the end, we’d done four websites in one and a half years before we got one that worked.”

It might not be your website that ends up costing you dearly, but something will – it’s the Murphy’s Law of start-ups. There are a seemingly endless number of ways to spend money, and it’s impossible to be wise about all of them. But a few common costly mistakes can sink a bootstrapped business.

Related: 9 Answers You Need About Yourself Before Starting Your Own Business

Here are six pitfalls to look out for, along with expert advice on how to avoid them.

Expensive mistake 1: The wrong team

Bill Aulet, managing director of the Martin Trust Center for MIT Entrepreneurship and author of Disciplined Entrepreneurship, says choosing the wrong team is the single costliest error entrepreneurs make, resulting in not only lost income and time but depleted morale.

“Choosing who to hire and work with in a start-up is like playing sports at school; you can pick your friends and play for them, but if you want to be good and continue to be on the field, you have to carefully pick your team,” he explains.

It’s crucial to choose people with varying skill sets. However, Aulet says, “much like a great sports team, they must also share some common values and the ability to trust each other in tough situations. That’s why past experience working with your co-founders and early employees in stressful times is much more important than being friends.”

Expensive mistake 2: Bad pricing

sarah-shaw-entreprenette

“My single biggest mistake with my first business – a handbag company – was in pricing,” says Sarah Shaw, CEO of consulting firm, Entreprenette.

Hers is a common misstep for product manufacturers.

“I didn’t understand that with any kind of clothing or accessories, you have to calculate the square footage of fabric, including the wasted fabric,” Shaw explains. Without an accurate understanding of her costs, she couldn’t price her products correctly.

“I thought you sort of doubled everything, but that’s not correct,” she says. “It’s a 2.5-times mark-up from cost to wholesale, which covers marketing, the showroom fee, all your expenses.”

By the end of her first two years in business, Shaw had put in more than $100,000 of her own money. Thanks to perseverance and media buzz (celebrities loved her bags), she ended up with $1 million in annual revenue and attracted investors, but she couldn’t recover from the downturn after 9/11 and closed the business in 2002.

Related: 5 Books To Read Before Starting Your Business

Expensive mistake 3: Waiting for perfect when good will do

When you’ve got a killer idea, it’s natural to want to introduce it to the world in a fully formed state. But it doesn’t take a chartered accountant to figure out that the longer you take to launch, the longer you go without money coming in.

“This is a common mistake, especially for tech people,” says Drew Williams, co-author of Feed the Startup Beast. “Many want to build an app and won’t let it go until it’s perfect, but then you take too long and spend too much.” Specifically, this error will likely leave you with no “runway” – the cash you’ll need to sustain you as you’re trying to get your product off the ground once it’s ready, but before you have customers.

“You need to come up with the simplest, basic version of your product that gets the idea across and try to find someone you can sell it to,” Williams says.

“Find one or two clients who are willing to do a pilot where you build, test and iterate it. Inevitably, your product will be different than what you expect, and then you build it. If you get a real, live client, you create a better product in a very cost-effective way.”

Expensive mistake 4: Not understanding technology

mary-juetten

Mary Juetten was no Luddite when she launched Traklight, a software company that helps individuals and businesses identify and protect intellectual property, but she didn’t know everything. “I understood how to lay out what our software would do… but I didn’t know anything about coding software or web development,” says chartered accountant, Juetten.

She relied on a co-founder with that expertise, but when that relationship ended, she floundered.

“This is where I made my biggest mistake: I looked for the best deal, and I didn’t educate myself about different programming languages or bring someone else into the mix.”

The team she hired to create Traklight’s software told her that it “couldn’t” be built in one programming language and “had” to be built in another. “If someone designing my website came up to me and said, ‘You should use this colour instead of that colour,’ I’d be asking 17 questions about why,” Juetten says. “But I never asked why about this, because it was technology.”

Related: 10 SA Entrepreneurs On What They Wish They’d Known Before Starting Their Businesses

The four-month window for software development turned into eight months, then nine more. “With technology, it’s all about time to market,” she says. “So entrepreneurs who are not technical should educate themselves.”

Eventually Juetten took a “tech speak for entrepreneurs” class. She suggests other start-up founders who need more expertise find similar instruction at Codecademy or General Assembly.

Expensive mistake 5: Skimping on lawyers

Tobin Booth, CEO of Blue Oak Energy, an engineering and construction firm for solar photovoltaic power systems regrets  skimping on legal fees in his company’s infancy.

“If I could do some of the early stuff over, it would have been to pay a few thousand to have a lawyer write up a proper contract,” he says. “I didn’t have the right attorney who really understood my business.”

A few early customers simply didn’t pay up, so Booth tried to move matters to a collections agency. “I found out that there were some clauses [in the contract] that didn’t allow me to collect on legal fees,” says Booth.

Shaw, meanwhile, unknowingly signed a contract that gave her handbag company the trademark to her name, so when investors came in, her name belonged to them. “I can’t use my own name in business again,” she says. “I wish I had hired an lawyer to watch out for me.”

Expensive mistake 6: Being cheap about marketing

“People think, everyone else has to market their product or service, but I don’t because this is so good,” says author Williams. The related myth is that you can rely on social media to build virality and attract customers for free.

“Social media is not free,” he says. “To do it properly takes unbelievable amounts of time, and it’ll typically take six months to a year before you’ve got even slight momentum – it’s not fast.”

If you’re not sure how much money to budget for marketing, Williams suggests aiming for 10% to 20% of your targeted gross revenue. “As you become a more established business, that drops to 5% to 10% of gross revenue, and for the largest businesses it’s typically 5% or a bit less,” he says.

After launching Traklight, Juetten found that her website wasn’t indexed properly for search engines. “No one was finding us,” she recalls. So she decided to invest in an inbound marketing program. “That initial payment is scary for a small company, but we don’t have to pay developers to make changes to our site, and they do e-mail marketing and CRM,” she explains. So far it’s working: In April 2013 the Traklight site recorded just 100 visits per month; by the end of the year it was getting 2,800.

How much does Juetten estimate she lost early on between the missteps in software development and inbound marketing? “As far as money thrown away – actual cheques written for useless things – that would be in the tens of thousands,” she admits. “As far as lost time [and] products not developed on time, it’s in the hundreds of thousands. We would be much further ahead now.”

In the end, the best way to avoid costly mistakes is obvious: Save and spend wisely. “Keep spending really, really tight,” Williams advises. “Leverage everything you can and give yourself as long a runway as possible. You’re going to need it.”

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Start-up Advice

(Podcast) Playing To An Audience Of One

When you’re starting out, you’re often playing to an audience of one.

Nicholas Haralambous

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When you’re starting out, you’re often playing to an audience of one. No one knows who you are. No one understands what you can give them. You need to really, really believe enough in what you’re doing to play to an audience of one until you can build up traction. Don’t give up too soon.

Listening time: 3.25 minutes

Related: (Podcast) What You Buy May Not Be What You Need

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Start-up Advice

Your Questions Answered With Alan Knott-Craig

Which comes first, customers or revenue? To make revenue, you need customers. Here’s how you build a business that people will care about.

Alan Knott-Craig

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How can I start a small Internet service provider ISP business? — Tonderai

This is similar to the hoary chestnut, “How can I take over the world?” The answer is the same. Sit at the knee of a master for two years (at least) and learn the game. When you have a sufficient network of contacts, and understanding of the business, head off on your own. How do you find a ‘master’? Identify an ISP that appeals to you. Get your foot in the door somehow, even if it’s just making coffee. Work your way to as close to the CEO’s door as possible by continuously over-delivering. Learn like a sponge.

The possible alternative to ‘find knee of master’ is to find a technical guy with zero sales inclination. Make him your partner. You become the front office (sales — find customers). He becomes your back office (tech — product delivery). If you can’t find a master or a tech partner, you can’t start an ISP.

Related: Want To Leave Customers Grinning And Vowing To Return? Do The Following

How do I find a co-founder? How do I find a development team? — Kirsten

For a technical co-founder, Tinder is best. Jokes. In fact, Tinder is the last place on earth to find a technical co-founder. Rather try family and friends. Conferences. University. Milk your networks by letting everyone know that you’re looking for a technical co-founder. Failing that, you must hire a development team.

The days of compensating software developers with equity in lieu of cash are long gone. Absent a technical co-founder, there is only one way to develop software: Pay for it. How do you find the right dev-house?

Word of mouth is best. The rules of thumb are:

  • Maximum project duration = three months.
  • Scope it once. Don’t change the scope.
  • Keep it simple.

For your first iteration, it usually makes sense to go with a young and relatively inexperienced crew (try www.avochoc.com). Yes, the product will not be future-proof, but your first version need not be future-proof. You just need something to start signing up customers and getting market feedback.

If you get traction, then you can start worrying about scalability and consider engaging with more experienced (and expensive) dev-houses.

I have invented a hamburger roll that ensures the patty and toppings cannot escape. Would you suggest I patent it?  — Albert

Interesting idea. From the photos, it seems your solution is a variation of a pita bread. It may be worthwhile reading Zero to One by Peter Thiel.

He argues that consumers will always resist change, even change that is very obviously good for them, ie: non-leaking hamburger rolls. The only way to introduce innovation into an established market is if it represents a minimum of 10x improvement over the status quo. Only such a quantum improvement will induce people to change behaviour.

Although undoubtedly a big improvement, I’m not sure the non-leaking hamburger roll qualifies as 10x innovation. And so it probably will not succeed in the market place.

Before patenting, I suggest you try sell some rolls to establish whether you can get traction and prove revenue potential.

Related: Direct Marketing: Go Where Your Customers Are

I’d like to launch an app with an advertising revenue model. What do you think? — Mvelo

I’m sorry to be the bearer of bad news, but advertising is an insufficient revenue model in South Africa. You need to figure out another way to make money. Most times, the paths to non-advertising revenue streams only reveal themselves once you have users.

You should work on the assumption that it will take you at least two years to get sufficient traction, therefore you need to have two years’ worth of runway before plunging into your entrepreneurial adventure. In those two years, you should be growing your users as much as possible.

The size of your user base will determine your negotiating power with potential investors and/or customers, and will determine the odds of success in finding a non-advertising revenue stream.

Okay, forget advertising. I’m going to charge my users a monthly subscription of R20. — Mvelo

I realise that it’s a chicken and egg situation, but it’s very hard to find backing until you have proof of your theory working in the real world. On other hand, it’s hard to get proof without first finding backing. That’s the entrepreneurial quandary.

Generally speaking, the egg comes before the chicken. The egg is users. The chicken is revenue. Before you can test your revenue theories, you need users. Refer to previous answer.


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How The Black Umbrellas Programme Can Boost Your Local Black Business

Going it alone and succeeding isn’t unheard of in entrepreneurial circles – but getting the right backing can accelerate your success. South African SMEs have a ‘big brother’ in Black Umbrellas, explains CEO Seapei Mafoyane.

Shanduka Black Umbrellas

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Vital Stats

Going it alone and succeeding isn’t unheard of in entrepreneurial circles – but getting the right backing can accelerate your success. South African SMEs have a ‘big brother’ in Black Umbrellas, explains CEO Seapei Mafoyane.

The networks that the programme has are extensive. Along with mentorship, when these building blocks come together, they do something really majestic for the outlook of SMEs.

The Challenge

“The perception of SMEs in corporate South Africa is that they’re risky, unreliable and incompetent,” says Seapei. This results in a lack of opportunities for SMEs because large corporates still view them as potentially risky.

Related: 10 SA Entrepreneurs Who Built Their Businesses From Nothing

Joining Black Umbrellas offers the following:

1. Cameraderie

Belonging to a group of people who are going through the same challenges that they are. I think it’s extremely encouraging to find people who understand the challenges in the environment you’re going through.

2. Entrepreneurial spirit

You find businesses in different sectors and at different maturity levels in their business lifecycle. It’s very encouraging for someone starting out in their business to find a more mature business, perhaps in their second or third year, that has banked some projects.

3. Relying on a big brother

Black Umbrellas has been able to build a brand that is recognised for understanding the needs of corporate South Africa and being able to empathise with the requirements and support structures of SMEs. What entrepreneurs look for in the programme is that big brother that helps them weather the storm.

The Solution

“In a market where there’s quite a visceral relationship between corporate South Africa — where the majority of markets are — and smaller, medium enterprises trying to locate those opportunities, Black Umbrellas really is a meeting place,” says Seapei.

“We provide a marketplace for corporate buyers and SMEs to come together in an environment that is trusted. Some of the opportunities our businesses are able to access would not have been accessible to them if they were flying solo.”

SMEs abound, but it’s not always easy for larger corporations to find, vet and mentor them.

SMEs that join the Black Umbrellas programme have reported reaching levels they never saw themselves achieving outside of the programme.

“It sounds overly-simplistic, but I think the change is tremendous when SMEs join Black Umbrellas,” says Seapei. “It’s quite a thing to watch: A business trying to do this on their own and how their outcomes change when they join the programme.” Black Umbrellas opens them up to a network of help that is as wide as it is deep.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

partnershipThe Power of Partnership

“We’d never be able to do anything we do without relying on collaboration,” emphasizes Seapei. “We rely very heavily on corporate partnerships to avail those opportunities to us and those markets for SMEs to be able to do what they do.”

Black Umbrellas has an extensive network of funders and donors that is expanding continuously and prides itself on being the custodian of SME development in South Africa. She says the programme aims to ensure high-impact SMEs produce incredible results to turn the outlook of the economy around.

One of Black Umbrellas’ longest-standing partnerships is with Transnet:

  • Transnet understands the mandate set out by Black Umbrellas and the need to invest in entrepreneurs.
  • We’re able to support their supply chain through the development of these dynamic businesses that go on to transform their supply chain and respective communities
  • Transnet has an incredible impact on the economy — through just two small incubators in Richard’s Bay and Port Elizabeth, with almost 500 jobs, which is a huge social return on investment.

BECOME A BLACK UMBRELLAS SME

Black Umbrellas’ mandate

Many start-ups don’t make it beyond the first two years because of inadequate planning, lack of support, financial or knowledge resources. Yet the growth of the SME sector in South Africa is vital for economic development of our country and in solving the unemployment crisis.

Black Umbrellas offers a platform through which to develop a business from its start-up phase to full independence. Because the programme addresses the multidimensional components required to develop an emerging business into a sustainable one, entrepreneurs are 100% supported on their business journey, which gives them the leverage to succeed. This support includes access to markets, networks and finance.

Programme benefits

Emerging businesses are supported with infrastructure, mentorship and collaboration, to assist their transition from incubation to viable, independent businesses.

For committed, hardworking and dedicated entrepreneurs, this multi-tiered business support programme is an important catalyst in enterprise development.

Related: 10 Dynamic Black Entrepreneurs

Black Umbrellas’ contribution to the economy

  • In seven years 1 000 SMEs have achieved a collective turnover of over R2 billion
  • The programme has contributed a combined R118 million in taxes back to the fiscus
  • Over 10 000 jobs have been created through our SMEs
  • R436 million in salaries has been contributed as a result of the programme.

Mistakes to avoid when establishing your SME within a large supply chain

Focus on a specific area where you can add real value. You’ll never be able to maximise every opportunity by trying to be all things to all people, says Seapei. “As an SME you want to find a particular niche that you can fill successfully, thereby maximising your unique value proposition.” 

Who should apply?

  • Entrepreneurs with a business enterprise at its start-up phase
  • The business should be registered with the Companies & Intellectual Property Commission (CIPC), and for small business tax
  • You must have the passion to succeed and be willing to work to achieve your business goals
  • You must be South African and black according to the BEE definition.

The 2017 National Enterprise Development Awards

Top performing small and medium enterprises have been recognised at the Black Umbrellas National Development Awards. Black Umbrellas established the National Enterprise Development Awards (NEDA) in recognition of the achievements of the entrepreneurs in their business incubation programme. These awards highlight the hard work and dedication required to establish and sustain a successful business that creates jobs and contributes to the economy.

The finalists were selected from regional enterprise development awards ceremonies held at each of the Black Umbrellas incubators across the country. The businesses in the incubators have altogether created and preserved over 10 000 jobs across key economic sectors, which include mining, construction, engineering, security services and project management.

Overall winners were:

  • Most Jobs Created: Hula Minerals and Processing
  • Best Performing Company: Aquila Projects (PTY) LTD
  • Best BU Ambassador: Recycle 1st
  • Overall National Winner: Modi Mining
  • Incubator of the Year: Johannesburg incubator
  • People’s Choice Award Winner: Recycle 1st

Seven Years  1 000 SMEs R2 billion collective turnover

  • Contributed a combined R118 million in taxes back to the fiscus
  • Created more than 10 000 jobs
  • Contributed R436 million in salaries
  • Expect more from your ESD Investment.

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