Starting a new company is often a challenging and lonely path and there are many ways in which a prospect can fail. In today’s economy, most businesses fail within five years, even when run by highly qualified and experienced individuals. In the fast-paced world of business, entrepreneurs need to learn to adapt in order to ensure their short- and long-term growth and success.
Here are some of the most common drawbacks that entrepreneurs experience, and how you can avoid them when starting a new business venture:
Mistake #1: Marketing
Starting a business without knowing your target market and how to communicate with them wastes time and money. Less is always more and if you can’t say what you need to say about your product in one minute, then you don’t know your market or your industry well enough.
Fix: You need to be prepared to sell yourself and your business. State the products/services that are available in a clear and concise manner. You have less than 60 seconds to make an impression whether you experience a chance encounter with an investor or meet with a curious customer.
Mistake #2: Competition
Selecting the incorrect business venture where there is already market saturation, high competition and inadequate demand can result in failure to differentiate your offering for competitor products and penetrate the marketplace. Entrepreneurs need to investigate their industry carefully and select a market segment with higher demand than supply.
Fix: A business that is built on your strengths and talents will guarantee a greater chance of success. It is also imperative that you’re managing the day-to-day operations and building and developing your company, keeping abreast of industry trends and developments and being aware of the competition behaviour and how they work.
Mistake #3: Free Internet programmes
Internet scams in the form of a ‘free’ business set-up programmes will not make you money. Hard work and dedication is required in order for your business to be successful.
Fix: If you require large sums of capital to launch your company, go back to the drawing board. Scale down expensive plans and simplify the idea until it becomes more manageable.
Mistake #4: Fragmented business opportunities
By starting one business venture, failing after a month and then embarking on the next prospect is how many beginners lose large sums of money and valuable time. Create your own business opportunity and corner your own market.
Fix: Avoid being side-tracked by attempting to juggle various ventures at the same time. This will cause you to spread yourself thin at work and limit both your effectiveness and productivity. If you feel the need to jump into another project, you might want to relook your original concept and work on refining your ideas.
Mistake #5: Quick and easy money
Another pitfall that first-time entrepreneurs can fall into when starting up a business is thinking that money can be generated over a short period of time without putting in long hours and hard work.
Fix: Only make purchases which are necessary and keep all costs in check by maintaining low overheads and managing your cash flow effectively. Your money is the lifeblood of your company and its ultimate survival will depend on your ability to budget effectively.
Mistake #6: Procrastinating
Entrepreneurs must not wait too long to launch their product. Procrastination could result in a competitor launching first. Don’t spend months or years waiting for the right time to execute
Fix: Develop a strategy and timeline and then focus on achieving the goals and objectives by scheduling tasks on a day-to-day basis so that they are executed by the intended deadline. Once you have launched your enterprise, you will learn to make decisions under pressure and not to repeat mistakes.
Mistake #7: Expenditure
Starting out small, but efficient, is the way to go. Hire only the employees you need and consider a home office until your business starts to grow. Forget about elaborate offices, fancy cars and extravagant expense accounts.
Fix: Capital should only be injected into items that will yield a return on investment in the long run, such as the correct equipment and technologies for your business to run efficiently, administrative and professional costs (accounting and legal fees), and sales and marketing costs such as training and networking events.
Setting specific goals
All entrepreneurs have to contend with tough competition and therefore must remain proactive in their efforts to stay ahead and learn new things. In order to avoid failure it is advisable to hire an expert who can guide you through the formative stages of the business and help develop it into a mature and successful operation. Business coaching is one of many highly effective business tools for assisting start-ups, increasing productivity and building and sustaining growth.
In my experience, entrepreneurs who undergo coaching before launching a new business are more likely to set specific and manageable goals, which are structured and formal, than their counterparts who do not seek the necessary advice. Coaches are also equipped to measure and evaluate their accomplishments over a specific period of time.
Alan Knott-Craig Answers Your Questions On Money And Partners
From starting the right business, to managing business partners and finding your magic number, there is a secret to happiness.
If I get rich will I be happy? — JC Lately
Does money equal happiness? Mostly, yes. Research in the US shows that your happiness is proportionate to your earnings up until you earn $80 000 per annum. Thereafter, incremental income gains have a negligible effect on your happiness.
In other words: More money will make you happy as long as you’re poor. Once you break out of poverty and enter a comfortable middle-class existence, more money will not make you happier.
These are the top three for old folks:
- I wish I’d spent more time with family.
- I wish I’d taken more risks.
- I wish I’d travelled more.
Therein lies the secret to happiness. Spend time with your family. Take risks. Travel.
But first, make money. Don’t do any of the above until you’re making enough money not be stressed about money.
What is the magic number? — Mushti
The magic number is the amount of money you need to not worry about money ever again. If you don’t need toys like Ferraris, yachts and jets, the magic number is R130 million. Here’s the math: R130 million will earn R9,1 million in interest annually (assuming 7% interest). After tax that is R5,46 million.
Assuming you need 50% to maintain a good lifestyle, that leaves approximately R2,7 million for reinvestment, which is enough to keep your capital amount in touch with inflation for 50 years. The balance of R2,7 million (after tax) is for your living costs. In South Africa, R2,7 million will afford you a lifestyle that allows you to send your kids to a great school and university, to travel overseas a couple of times a year, and to live in a comfortable house.
Over time your living costs (and inflation) will eat into your capital amount. After 50 years you should be down to nil, assuming you earn zero other income in that time.
In 50 years, you will probably be dead. If you’re not dead, your kids will be able to support you (because they love you and they have a great university education).
I am the sole director of a company (the others still have full-time jobs and don’t want to be conflicted) and there is pro-rata shareholding based on our initial shareholder loans. However, I am putting in most of the hard work, together with one of the other actuaries. How best do I manage the director/shareholder dynamic? I obviously want to make as much progress as possible but there are times when I need the input from the others (and their responses aren’t always as quick as I would like). — Mike
If you have any perception of unfairness regarding effort/risk vs reward, deal with it NOW! You can’t do so later. The best approach is honesty. Call your partners together. Explain your thinking. Perhaps argue for 25% ‘sweat equity’ for yourself. Everyone dilutes accordingly. Ideally cut a deal whereby you have an option to pay back all their loans, plus interest, within six months, and you get 100% of equity (unless they quit their jobs and join full-time).
Equity dissent must be resolved long before the business makes money, otherwise it will never be resolved.
What do you think of WiFi in taxis?— Ntembeko
It’s a good idea, but not original. Before embarking on a start-up, you should survey the landscape for competitors. Just because there are none doesn’t mean no one has tried your idea.
It just means that everyone that tried has failed. You need to be 100% sure that you have some ‘edge’ that makes you different from everyone who came before you (and failed). Otherwise you will fail. What is your advantage that is different to everyone who came before?
Read ‘Be A Hero’ today
What You Need To Know About The Lean Start-up Model
The Lean Start-up philosophy was developed by Eric Ries, a Silicon Valley-based entrepreneur who also sat on venture capital advisory boards. He published The Lean Startup in 2011, igniting a movement around a new way of doing business.
The model follows key precepts that include:
Taking untested products to market
The fact that too many start-ups begin with an idea for a product that they think people want, spending months (or even years) perfecting that product without ever testing it in the market with prospective customers.
When they fail to reach broad uptake from customers, it’s often because they never spoke to prospective customers and determined whether or not the product was interesting. The earlier you can determine customer feedback, the quicker you can adjust your model to suit market needs.
The ‘build-measure-learn’ feedback loop is a core component of lean start-up methodology
The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a start-up can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect.
Utilising an investigative development method called the ‘Five Whys’
This involves asking simple questions to study and solve problems across the business journey. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.
Lean isn’t only about spending less money
It’s also not only about failing fast and as cheaply as possible. It’s about putting a process in place, and following a methodology around product development that allows the business to course correct.
Progress in manufacturing is measured by the production of high quality goods
The unit of progress for lean start-ups is validated learning. This is a rigorous method for demonstrating progress when an entrepreneur is embedded in the soil of extreme uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build — the thing customers want and will pay for, rather than an idea you think is good — you need not spend months waiting for a product beta launch to change the company’s direction. Instead, entrepreneurs can adapt their plans incrementally, inch by inch, minute by minute.
Start-Up Law: I’m A Start-up Founder. Can I Pay Employees With Shares?
Bulking up employee salaries with equity is a common method to attract, retain and incentivise top talent.
Every early stage start-up company battles with restricted cash flow and not being able to pay market related salaries to their employees. Bulking up employee salaries with equity is a common method to attract, retain and incentivise top talent.
Can I pay salaries with shares?
South African labour laws require that employees be paid certain minimum wages, and “remuneration”, as defined within the Basic Conditions of Employment Amendment Act, either means in ‘money or in kind’. ’In kind’ does not include shares or participation in share incentive schemes, as determined by the Minister of Labour. As such, there is no room for start-ups to completely substitute paying salaries with shares or share options. However, there is no restriction in topping up below market related salaries with equity via an employee share ownership plan (‘ESOP‘).
Employee Share Ownership Plans
There are a variety of ways in which employees can be incentivised, and it will always be important for the start-up founders to consider what goal they wish to achieve by incentivising their employees.
ESOPs can be structured in several ways, for example: employees may be offered direct shareholding in the company, options for the acquisition of shares in the future; or alternatively, a phantom / notional share scheme can be set up.
ESOPs permit employees to share in the company’s success without requiring a start-up business to spend precious cash. In fact, ESOPs can contribute capital to a company where employees need to pay an exercise price for their share options or shares.
The primary disadvantage of ESOPs is the possible dilution of the Founder’s equity. For employees, the main disadvantage of an ESOP compared to cash bonuses or bigger salaries, is the lack of liquidity. If the company does not grow bigger and its shares does not become more valuable, the shares may ultimately prove to be worthless.
Some key features to consider when setting up an ESOP are:
- ELIGIBILITY – who will be allowed to participate? Full time employees? Part-time employees? Advisors?
- POOL SIZE – what percentage of shares will be allocated to incentivise employees?
- RESTRICTIONS – will employees be able to sell their shares immediately?
- VESTING – will there be a minimum period that service employees will have to serve with the start-up to receive the economic benefit of his or her shares?
Employee share ownership plans are great corporate structuring mechanisms for attracting and retaining employees, as well as fostering an understanding of the company ethos and encouraging loyalty and productivity. It is essential when implementing an ESOP that all the tax implications are considered and that the correct structure and legal documentation are in place.
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