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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

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“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

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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

Establishing A Start-Up Business And The Challenges Of Internationalising

The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.

Martha Jameson

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To begin, a start-up is a business looking to establish a product or service for the first time. They’re perceived as young companies initiating a start within their local economies with the solid intent of providing something new for consumers. Once established in local markets, start-ups can then initialise global expansion creating a broader market for their product. The process of establishing a company does not come easily however; and to succeed an entrepreneur must be readily prepared for the challenges ahead.

The first and foremost part of establishing a company, is defining the company’s inner vision. The inner vision covers what the company desires to offer their consumers, the values they look to instill in their employees to provide the consumable or service, the objectives that necessitate the company’s promise, and directives or order necessary to progress the company path. The inner vision serves as the company’s foundation, a game plan or playbook used to project them into the world of entrepreneurship.

Once a company understands their vision, they can then look to the markets to analyse the need or value of what they have to offer.

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

Market analysis is the second set to establishment. One must look to the market first to see what the demand is. Where there’s demand, there’s consumers. This step is often overlooked in the initialisation process, and tends to be where most companies falter. There’s more enthusiasm involved in just jumping into the market, than there is taking the necessary step back to view the market pragmatically.

“Thus, companies may fail to offer something new or better than what already exists in the economy. Market analysis grants a business the foresight necessary to gain a stable foothold, and permits an entrepreneur the chance to tailor the company vision and goals to consumer demand,” says Amanda Jicks, an entrepreneur from WriteMyX.

Once entrepreneur understands what’s available and necessary, the company can then project their personal goals on the market. What do they bring to the market, how does their provision differ from what competitor might have to offer. This analytical groundwork allows the a company to establish the foundations they’re going to lay and process further projections for future growth.

After the goals are set into the company’s plan, an entrepreneur must then culminate the resources that will  get the company off the ground. This, of course, is establishing the production necessary for consumables or company attendance necessary for services, obtaining the funds to create and employ, calculating and providing for the costs of advertising and branding to get the company’s name out into the market as a profitable entity.

Local Markets lay down the baseline and a company should secure their local market before seeking expansion into the global or international market. Security within the local market grants companies a better means to attain the provisions necessary for growth.

“To further the foothold analogy, picture the entrepreneur as a base jumper. An experienced base jumper isn’t going to approach the cliff underprepared. They would know the site lept from, the best place to sink their line into the cliff’s face, the “foothold” that secures the line for the jump,” says Nolan Harris, a business writer at 1Day2Write and OriginWritings.

Related: 21 Steps To Start-Up Success

When a company is secure in their local market, they can then consider expansion and better face the challenges that accompany expanding into the international market. These challenges range from product or service alterations that may be necessitated due to import/export technicalities. Language barriers that may arise when promoting or branding beyond the local market.

Language barriers that may occur when communicating with the company’s customers. There’s also the cost of provision when considering international expansion. International expansion can be perceived as a daunting risk if the company isn’t ready to provide and may, in fact, not be the correct direction for all start-ups. But, if internationalisation is a goal the entrepreneur should initiate the launch with the same analytical approach used for the local markets; as the need and demand may differ from local market projections. The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.

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Start-up Advice

7 Top Lessons You Can Learn From The US Cannabis Market

The benefit of not being the first country to start the process of legalising weed, is that we can learn from the mistakes and pitfalls US entrepreneurs made when cannabis became legal in their states.

Nicole Crampton

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US entrepreneurs have already launched and successfully grown their recreational cannabis businesses. It wasn’t a flawless transition in some states from illegal to legal, they made mistakes and focused on underperforming strategies or on not hiring the right experts.

The bright side is, you can learn from their pitfalls, ensure your business has a competitive advantage and that you are prepared for the major shifts the US cannabis market experienced.

Since the South African Cannabis Industry will undoubtably have 24 months to wait until any legalisation progress is made, you can start preparing your cannabis related business and strategising how to incorporate the following lessons:

Lesson 1: Don’t be the first

Under normal circumstances you would want to be the first to break grown on a new industry, because the early bird doesn’t have competition yet, develops a relationship with customers and is the only supplier until another business gets up and running.

So then why shouldn’t you be first? The answer is “There is a difference between pioneers and settlers. Pioneers got arrows and settlers got land,” says Christian Hageseth, founder and CEO of Denver’s Green Man Cannabis, a retail and grow operation well-known for its connoisseur grade craft cannabis, and for ONE Cannabis, a cannabis business franchise.

“I’m much more interested in being a settler in the cannabis industry. You don’t know how regulators or banks are going to react as legalisation changes, so it’s beneficial to not be the first to market.”

Lesson 2: Make a proper transition from the black-market to the legal market

marijuana-legal-market

In the US Market those transitioning from black-market to the legal market found there were rules and regulations they weren’t even aware of, which made it difficult for them to stay compliant. If you’re undertaking the same transition, there are a few things you’ll need to keep top of mind:

  • There will be regulations and legislations that you aren’t aware of that you need to be compliant with.
  • You will now be operating in a tightly-regulated space with tax and banking restrictions, business owners can find themselves entirely unprepared for the pressures of keeping a legal operation in the red.
  • You’ll need to keep detailed financial and accounting records to ensure your business remains compliant and sustainable.

Related: 10 Cannabis Business Opportunities You Can Start From Home

Lesson 3: Hire the right experts

Navigating the still-forming cannabis industry can be challenging. In the US cannabis industry entrepreneurs thought they could navigate it themselves or were scammed by con artists pretending to be experts.

To ensure your business remains sustainable and compliant here is some advice on what to look for in your experts:

“It’s in your best interest to find an accountant who has been through an audit or two with a marijuana company. If you don’t file your taxes the right way from the start, your business can get very far behind,” says Hageseth.

“Your business will greatly depend on the legislation in your market, so work with a lawyer who is well versed in several cannabis markets and regulatory frameworks in order to best protect your business,” says Chloe Villano, founder of Denver-based Clover Leaf University.

Ensure you’re hiring a legitimate expert

A common misstep made by US entrepreneurs is hiring amateurs posing as experts. Scammers see the opportunity to benefit off your business by misrepresenting themselves as experts in the cannabis industry.

Keep on the lookout, they’ll tell you everything you want to hear, but don’t have anything to deliver or back it up. Do your due diligence to ensure your business is working with a competent advisor and isn’t being misled by a scam artist.

Lesson 4: You don’t need to grow or sell weed to make money

In the US, the price of marijuana skyrocketed just after it was legalised. According to Forbes the average wholesale cost of cannabis in Colorado dropped from $3 500 per 0.45kg’s at the start of legalisation in 2013, to roughly $1 012 per 0.45kg’s in 2018.

This is because sellers were adjusting their prices based on demand. As more competition enters the market, experts are predicting the price of cannabis to plummet. In Oregon, marijuana is already selling at $50 per 0.45kg’s, which is driving some cultivators out of business.

If you consider the above trend, growing and selling weed directly could be one of the least profitable approaches. In the US, there are very high barriers of entry to growing and selling cannabis that include applications, lawyers, security compliance, tax fees, audits, your inability to claim business expenses, and the constantly changing regulations.

For example: On 1 July 2018 in California, the packaging and testing standards for cannabis were changed. Every dispensary had to throw out all of their products that didn’t meet these new regulations. This cost entrepreneurs millions in inventory and a few weeks later the state changed the regulations back.

You can still make a profit from the marijuana industry, without actually selling or growing it yourself.

Related: The Ultimate 101 List Of Business Ideas To Start Your Own Business In South Africa

Lesson 5: What you need to know about pricing

weed-pricing

As mentioned above, with the rising demand for cannabis, in the US market, the price shot up. “The main thing we found wasn’t that you couldn’t get product, it’s that you couldn’t get product cheap,” said Dave Cuesta, now the chief compliance officer for Native Roots, the largest dispensary chain in Colorado.

In 2014, he was an investigator for the Marijuana Enforcement Division, he says: “You could walk into a store that sold both medical and recreational, and you were paying $30, $35 for an eighth on the medical side, and it was $60 or $70 on the recreational side. People were just adjusting their pricing to manage supply.”

Since this is likely to happen within the South African market as well, you can implement a strategy to have more supply than your future competitors. This will enable you to undercut the market when the demand for both medicinal and recreational marijuana increases.

Lesson 6: You’ll need to be adaptable

As mentioned previously, in the US regulations fluctuated until the government could determine the best way forward. Since this will also be a learning curve for parliament you’ll need to be able to pivot or agilely handle each change as it’s thrown at you.

Here are a few examples of changes the US entrepreneurs had to navigate:

For example: Content producers in California face fees and legal penalties if they mention any unlicensed cannabis brands.

Another example: Brands in Colorado, Washington and California that used the event High Times Cannabis Cups to move their product, suddenly lost a major source of income when vending was no longer allowed at the event.

A further example: In Washington DC, marijuana events that were legal last year are now being raided and people are being arrested.

If you don’t move with the industry you’re either going to be left behind or find yourself being fined or imprisoned for breaking the law.

Lesson 7: Raise more capital than you need when starting out

Considering how often regulations changed in the states in first few months, even the first few years, you’ll need to be able to afford to handle any changes that your business comes across.

 “Always raise more money than you think you need and don’t expect business to come easily. In fact, expect everything to go wrong, because the regulations will change often, and your plan will become obsolete,” explains Villano.

Changing regulations can cost you an entire crop or all of your painstakingly designed, unique and innovated, costly packaging. Ensure you remain agile and be flexible enough to handle any unexpected costs that come along.

By implementing these top lessons and seeking the expertise of financial and legal professionals, you can successfully navigate the cannabis industry. To run a sustainable business that will achieve long-term growth your venture will need to jump the cannabis industry’s unique hurdles, maintain compliance and avoid costly and often business-ending fines.

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Start-up Advice

Your Best Ideas Are The Ones No One Else Believes In

Airbnb, Rent the Runway and Foursquare all seemed odd – or even off-putting – at first glance.

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As you consider new ideas for your next project or business, give extra credence to the things you believe to be true that others doubt. The most exciting products are created by people with tons of conviction for something that strikes most others as odd. I’ve heard from Joe Gebbia, co-founder of Airbnb, that when he and his co-founder Brian Chesky pitched the idea of having strangers sleeping in your home when you weren’t there, many investors shifted uncomfortably in their seats.

One investor shared that he had never had such a visceral negative reaction to a business idea, ever. Jenn Hyman and Jenny Fleiss, co-founders of Rent the Runway, told me they encountered similar doubts when they pitched the idea of renting dresses rather than owning them.

For both teams, first reactions from people were often strongly negative. I cringe to think what focus groups would have done with these ideas. But, Chesky and Gebbia, and Hyman and Fleiss, were undeterred. To these founders, their ideas were obvious and they set out to find investors and employees who got the vision when most everyone else did not.

While he is an outspoken and notoriously controversial contrarian, Peter Thiel has had undeniable success starting and investing in highly disruptive businesses that were, without a doubt, venture worthy. PayPal, Palantir and Facebook to name a few.

In order to gauge whether something he is persuing is venture-worthy, there is one question he asks everyone he interviews or invests in: “What important truth do very few people agree with you on?”

Related: 5 Actionable Tips For Novice Entrepreneurs To Skyrocket Their Business

In his book Zero To One, Thiel goes on to explain why he asks the question and what he looks for: “This is a question that sounds easy because it’s straightforward. Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is, by definition, agreed upon.

And it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply than genius.”

He goes on to share some examples: “Most commonly, I hear answers like the following: Our educational system is broken and urgently needs to be fixed; America is exceptional; there is no God. These are bad answers. The first and the second statements might be true, but many people already agree with them. The third statement simply takes one side in a familiar debate. A good answer takes the following form: ‘Most people believe in x, but the truth is the opposite of x.'”

Chesky and Gebbia believed that most people thought hotels were the only option for travelers, but the truth was that renting someone’s extra room was cheaper with an added dose of personalised hospitality – and likely a higher margin business as well. Hyman and Fleiss believed that most people thought they needed to buy the dress they wanted to wear, but the truth was that you didn’t need to own a dress that you only wear a few times. Both teams set out to challenge old customer preferences with modern technology and logic.

If you can discern a truth early on and start it before anyone else, then you can front-run the future.

As a manager, this may take the form of believing that people with less experience but lots of initiative tend to outperform experts. It may mean looking past the traditional resume. As an entrepreneur, this may be a conviction that some social stigma, like sleeping in someone else’s home (Airbnb), wearing someone else’s dress (Rent the Runway) or persistently sharing your location with all your friends (FourSquare), will lessen over time and eventually disappear.

Related: 4 Fundamentals To Successfully Jump-Start Your Start-up

Over the past five years, as I have chronicled the lessons learned by great founders and leaders traversing what I’ve come to call “the messy middle,” I have noticed a few recurring themes that I cover in my new book by the same name.

Chief among them is the need for us to learn to value conviction over consensus. While our natural human tendency is to seek validation from others and avoid disagreement when possible, the business of innovation is different.

You need to develop tactics to recognise and double down on the deep conviction you have in your gut that nobody else understands. Stop looking for consensus or opportunities that seem obvious and compelling at first glance. Great opportunities never have “great opportunity” in the subject line. Honing your gut instincts and acting upon conviction is a theme of every successful journey.

This article was originally posted here on Entrepreneur.com.

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