Starting a Business?
The Keys to Success or How NOT to Fail
by
K. MacKillop, CEO LaunchX
Published by LaunchX at Smashwords
Copyright 2010 LaunchX LLC
Discover other titles from LaunchX at Smashwords.com
Smashwords Edition, License Notes
This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each recipient. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.
Table of Contents
Chapter 1 -- The Truth About Startups
Chapter 2 -- The Pros and Cons of Entrepreneurship
Chapter 3 -- The Startup Spectrum
Chapter 4 -- The Truth About Startup Risk
Chapter 5 -- Why Businesses Fail…And How They Succeed
Chapter 7 -- The Entrepreneur Mindset
Chapter 8 -- The CEO Skill Set
Chapter 9 -- What You Can Achieve
Bonus Chapter -- Myths About Startup (That Lead to Failure)
Introduction
For most aspiring entrepreneurs, the greatest obstacle to taking the leap into entrepreneurship is fear of failure. After all, you are putting an awful lot at risk – your time, your money, and your career path…not to mention your reputation!
But the truth is that entrepreneurship is all about slaying risk. The better prepared you are to turn your good idea into a great company, the better your chances of success!
This LaunchX ebook is all about the basics of success and failure in startups and the profession of entrepreneurship. Like any other profession, the better your understanding of what entrepreneurship is all about, the easier it will be to make the right decisions for you.
Chapter 1 -- The Truth About Startups
There are all kinds of random myths and stories running around out there about startups. In fact, a Google search for business startup turns up literally millions of results. It is estimated that there are around 6 million businesses with employees in the US, and about three times as many without (the self-employed).
Since you are likely considering joining the ranks of all these business owners, it is important to understand who you are joining and why they are all there, as well as how this change in profession will impact your life and your community.
Who Starts Businesses?
Entrepreneurs come in all shapes and sizes, from all levels of education and from all types of backgrounds. The majority of the independent self-employed are older white males, though women and minorities have been going out on their own at ever higher rates. The greatest increase in entrepreneur demographics have come through immigrants to the US…they are far more likely to launch a new company than native-born folks. In addition, the under-35 crowd has been more aggressive about taking control of their work lives through entrepreneurship, a trend that is likely to continue, especially while jobs are scarce.
The latest research shows that over 50% of all American adults have dreams of owning their own business, but the actual rate of confirmed startups is around 600,000 per year. During the past two or three years of the Great Recession, those numbers have come in a bit lower. The 600,000 figure comes from the government, thus it likely includes only people who take the official step of filing organizational paperwork.
Why Are New Businesses Launched?
People choose entrepreneurship for all kinds of reasons. Some want the control and autonomy of working for themselves, some decide to take the leap out of necessity. Some have a particular thing they just love to do, some just want a shot at improving their financial position. The truth is, there is no good or bad reason for taking control of your work life, but it is important to know why you want to become an entrepreneur and what you hope to achieve from the effort.
The most common reasons new business owners give for going the entrepreneur route are:
Money
The number one reason for choosing entrepreneurship is to make more money. And those folks aren’t wrong – launching a successful company is the best, if not the only way to make yourself wealthy. Of course, you have to plan and build the right kind of business, but the money is out there to be made.
Autonomy
While being a business owner usually means working more hours than a regular job, you are working for yourself, and you get to actually dictate how you spend your working hours. There are certain lifestyle businesses that really lend themselves to achieving this goal.
Freedom
Many folks actually aren’t in it for the money…at least not any more than they need to be comfortable. What they really want is the freedom to pursue hobbies, spend more time with their families, or pursue other passions. The right type of startup can give you that as well.
Passion
This is the most talked about reason to go into entrepreneurship, but probably the least realistic. The truth is, pursuing a passion, such as a favorite hobby or skill, typically means limiting your profit potential, especially if your goal is to work in the business long-term. Of course, it is possible to create a well-paying job for yourself doing exactly what you love…but that’s not quite entrepreneurship. Not to worry, we will cover this topic more in a later Chapter.
Necessity
This recession has pushed a lot of folks into entrepreneurship who otherwise might not have considered it an option before. A great many of the industries that were heavily affected by the downturn still aren’t replacing the positions that existed before, so going out on your own is a better option than languishing on unemployment. This reason is especially common for immigrants…it’s hard enough for native-born folks to find any security working for someone else. A little time, money, and knowledge combined with a lot of motivation can get you making money for yourself relatively quickly.
The odds are that your reasons for choosing entrepreneurship fall into one or more of the categories above, or you may have your own reasons. Regardless, why you are selecting this path isn’t nearly as important as how you go about achieving your objectives!
The Impact of Startups
Choosing the entrepreneurial path will have a significant impact in all areas of your life, and can effect change in the community around you as well.
People who become successful entrepreneurs truly do change their lives. It’s just not the same as working a 9 to 5 for someone else. You gain significantly more responsibility, and you actually reap the rewards of the effort you put out. There’s a real feeling of grabbing the reins of your own life that comes from being the one who makes the decisions about where your own life is headed.
And, most entrepreneurs find that all those folks who wish they could go out on their own start to look to you for advice, guidance and support. Business owners tend to be perceived as natural leaders, in great part because so many others want to be just like them, in part because pulling yourself up by your bootstraps and making critical life choices are standard actions of true leaders.
Your role as an entrepreneur CEO brings with it a lot of power and unlimited potential. You are choosing the profession of entrepreneurship, so the impact on your professional life is similar to completely changing your vocation to a better, more lucrative career path. There is a lot to learn, and your increased knowledge, skills, and understanding of the world around you just makes you a little different person…for the better!
And, for most of us, once you get a taste of the independence, autonomy, and potential to reach the stars that entrepreneurship offers, you won’t even be able to picture yourself going back to work for someone else. Many very successful entrepreneurs, once they have taken an idea from just a thought to a thriving company, tend to want to do it again, and again, and again. Others are content to focus on a single business throughout their entrepreneurial careers, but are always looking for ways to grow, expand and improve what they do. Either way, your new career as an entrepreneur is likely to be your last!
In addition to the impact that entrepreneurship will have on your personal and professional lives, a successful startup affects the rest of us as well. Whether you are launching a local shop or restaurant that puts folks from your community to work or you build a corporation that hires hundreds (eventually), trades on the stock exchange, and contributes to paying our federal bills, your startup will make a difference. It’s like tossing a pebble into water…even the smallest ripple creates change across the pond.
Chapter 2 -- The Pros and Cons of Entrepreneurship
While it’s true that entrepreneurship is the only profession that allows anyone to become wealthy and provides the best opportunity to take control of your work life and financial future, it’s not always the easiest path to follow. Like all great things in life, it requires commitment and work to succeed.
There is a foundation of skills and knowledge you must master, and you can expect some obstacles in your way. But, as things begin to come together and you watch your profits soar, the hard parts of this career path seem to fade away and you only remember the good stuff.
But it’s always good to go into a new venture with your eyes wide open, so let’s take a look at the realities of entrepreneurship – the pros and cons of pursuing this new profession.
Defining Entrepreneurs.
First, however, it is important to be clear about what entrepreneurship actually means. The term “entrepreneur” is all around the popular culture right now. There’s a standard joke out there that you have probably heard. It goes: My son calls himself an entrepreneur…that means he’s unemployed! Unfortunately, it’s too often true!
Entrepreneurship, as a professional title, has been co-opted by anyone who wishes they were independently wealthy, professional, successful owners of thriving companies. There is the guy who sits on the living room sofa, hour after hour, trying to think of the one idea that’s going to make millions overnight…and he calls himself an entrepreneur. There’s the college dropout who spends her days surfing the web, searching for just the right MLM to make her rich without any cash or work required…and she calls herself an entrepreneur.
There are folks out there trying to scrape together a buck through whatever trend is out there – uploading curious websites, creating useless apps, pawning ebooks that contain absolutely no information at all, tricking folks to sign up on mailing lists that they turn around and sell to unsuspecting business owners. Some might even be trying to sell a legitimate product, but without the skills to market and manage a real business, they just don’t get very far. All these people fancy themselves entrepreneurs.
They are not entrepreneurs, at least not the way that we define it at LaunchX. In our humble opinion, entrepreneurs are those of us who, like you, are serious about launching a legitimate company. Those who are eager to do what it takes to master the profession, who are willing to work hard and work smart to reach our financial goals and entrepreneurial dreams. Entrepreneurs are experts; they are true professionals.
True entrepreneurs understand the importance of their role in society, and they take those responsibilities seriously. They recognize how living with integrity and developing a positive reputation will be critical to their long term success. Entrepreneurs get that the only way to make themselves truly rich is to provide real solutions to the market, and find a way to get the message out.
Done right? Mostly Positive!
The reality of entrepreneurship leans mostly to the pros, especially if you treat it as the profession it is. You do gain significant control over your work life and your financial future. You have more control over your own time and you can focus your efforts toward reaching the level of success you seek. And, if it’s security you are looking for, entrepreneurship puts the ball in your hands. You make your own security by the work you do to build a stable, profitable company.
The downsides of entrepreneurship are not necessarily what you might think. Most people assume that going out on your own is an extremely risky choice, but that’s only true if you don’t have the tools and knowledge to control the risk. Many people figure you have to have lots of your own money already to be successful. While you do need to put up some of your own cash to learn the ropes and create a solid plan, the cash you will need to launch and grow your company is readily available for prepared entrepreneurs with developed ideas!
The truth is that entrepreneurship, like any other lucrative profession, requires you to become an expert in the field. You will need to work hard, at least insofar as you want to succeed. You will have to commit to your goals, and persevere through, over or around obstacles that get in your way. You will probably eat, sleep, and breathe your startup during the earliest stages. Other people, those who prefer to remain safely ensconced in the cubicle life, might think you are crazy. Heck, some of them will even tell you so!
For those who succeed as entrepreneurs, the trade-offs are well worth it. If grabbing the reins of your life is important to you, entrepreneurship is the best route to choose.
Done Wrong? Ugh.
Attempts to launch a business with the wrong motivation or an empty tool shed can lead to all kinds of problems. Without the proper preparation, you are putting your money, your family, and your future at risk. Your health will be affected, your relationships will be under enormous stress, and your bank account will likely be empty. The truth is that there is just no reason to go that route.
Aside from being the only real way to create wealth, entrepreneurship is a profession in which anyone with the drive and will can be successful. Anyone.
Chapter 3 -- The Startup Spectrum
Starting a business has a million definitions, from the ten-year-old mowing the neighbors’ lawns to the VC-backed, million-dollar tech startups you read about in business magazines. Different types of startups yield very different results, and the right path for you really depends on what you want for your life.
The basic strata of business ownership includes these categories:
Employee
These folks work for someone else. The work they do serves to increase profits for the guy who is actually in charge, and these folks rarely have much control over their work lives, and are stuck in someone else’s financial plan for their future.
Starving Artist/Survivalist
These folks, while self-employed, typically work lots of hours for very little return. The starving artist types find some glory in the struggle, as though the pain of an empty wallet makes them more of an entrepreneur. The survivalists tend to use a basic skill that they already possess to assert their independence, working hard for minimal wages, often because they just don’t know how to grow or manage a business.
Lifestyle – Hobbyist
Lifestyle businesses are not the ones that will make you wealthy, but they might meet other objectives for you. The hobbyist startup is usually based on a favorite activity or interest (passion-driven), and may be designed to just bring in some extra cash, rather than to serve as a standalone income stream. Examples include craft businesses or occasional consulting gigs, and are usually home-based for the long term.
Lifestyle -- Professional
These startups are generally intended to replace or create a job for the business owner. They generally aren’t interested in growing the business too much, and often select the startup idea based on what they would like to do for work on a day-to-day basis. Professional lifestyle businesses include most consultants, independent contractors and other avenues for owning your job, such as the chef/owner of a restaurant. They may be home-based, and many of the business aspects are outsourced to other professionals so the owner doesn’t have to deal with them.
Lifestyle – Entrepreneur
A step beyond the lifestyle professional is the lifestyle entrepreneur. These folks are aiming a little higher than the others, but may choose to exchange great wealth for more free time or other personal priorities. They run the ship as a CEO, commanding both the operations and business sides of the startup. They are capable of growing their company, but make a conscious choice to limit its size. They may work in the business some of the time, but the majority of their attention is on the oversight and management of the company and its staff.
Entrepreneur CEO
The entrepreneur CEOs are the folks who are ready to take a good idea and turn it into a great company. They spend most of their time working on the business, rather than in it. Their “passion” is directed at making money, building a great company, and developing into a leader in the business community.
The truth is that only the last two categories are legitimately entrepreneurs, at least in our definition. Several resources define an entrepreneur as “…one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods.” That is, someone who has and uses the knowledge and tools of business to make money.
Our favorite definition of an entrepreneur is “…those who will live like others won’t, so they can live like others can’t.” However you slice it, the responsibilities of a true entrepreneur are very different from those of employees, starving artists, survivalists, and most lifestyle business owners.
The role of an entrepreneur CEO is primarily focused on the business of business. A good entrepreneur can run just about any type of company, in any industry. The operations of your startup are important, but not nearly as important as your ability to creatively and effectively manage the business side of things. The truth is, not all business owners are entrepreneurs, and far more people count themselves into the profession than really belong there.
That said, there is nothing wrong with being a lifestyle business owner or even a starving artist “entrepreneur” if that’s what will meet your personal objectives! But since you are reading this ebook, the odds are that you are looking to fit yourself into the entrepreneur category, with all the benefits and opportunities that come with that profession!
Defining Success.
Your first step to ensuring success in your startup is to really define what it is you want from the experience. What are your actual priorities and goals for going out on your own? What do you want your life to look like after one year as an entrepreneur? After three years? Five?
The better your definition of success, the easier it will be to select the right startup idea to pursue, to eliminate your risk, and to achieve your entrepreneurial goals.
Chapter 4 -- The Truth About Startup Risk
Aspiring entrepreneurs’ greatest fears are usually related to risk. They worry about risking their cash, their time, their reputations, and their lifestyle for what seems like a very slim chance of success. And the popular media doesn’t do much to assuage those fears. They report exaggerated estimates of startup failures, they harp on how tough it is for small business owners, they talk about startup successes as though they are either very lucky or possess some magical skills.
On the other side of the coin are the scammers out there claiming they can turn you into an overnight millionaire without any work or money from you. They promise to share the secret that made them instant millionaires if you just hand over your hard earned cash to them.
The truth, of course, lies smack dab in between these two extremes. Is there a high failure rate for new startups? Absolutely. But most of those failures can be traced back to a basic lack of business skills on the part of the owners!
What’s the real startup failure rate?
There are wild statistics running around out there that put the failure rate of new businesses as high as 80% to 90%, meaning 8 or 9 of every 10 startups fail to ever turn a profit. Other estimates put the failure rate as low as 50%. But as we all know, statistics don’t mean much without the actual data to back them up.
If you are talking about the failure rate of every American who claims to start a business, those higher estimates are probably accurate. There are thousands of folks every year who pay for a business license or file LLC paperwork and, for whatever reason, don’t go any further with their plans. Technically, those businesses count as failures. And, many of the estimates are based on surveys rather than actual business filings…so if you say you are going to start a business this year, but don’t, you might be included among the startup failures.
The best estimate for an actual failure rate is the Theory of Thirds. This hypothesis states that for all startups that are actually launched (sales are made or marketing is attempted), one-third never earn a profit, one-third eventually break even, and one-third actually make money within the first three years.
This theory is based on regional samples of businesses actually launched, as well as the outcomes of VC and Angel investments. Those major investors expect to earn high returns from one in three of the companies they invest in, hope to get at least their investment back from the second company, and know their cash will be gone with the third. Of course, they are usually dealing with well-developed ideas and really have no idea which of the three will be the superstar, but those are the numbers they expect.
You might be thinking that if those guys who are getting VC money only have a one-third chance of succeeding, the odds are really bad for you. Not true. Venture capitalists are typically pouring millions into a business that has some traction, but they are looking for enormous returns. When you are talking about rapid scaling up and huge influxes of cash, all kinds of new problems surface. Most startups have a smoother, slower ramp up, which is much easier for skilled entrepreneur CEOs to control.
Technically, the Theory of Thirds means that two out of three startups are failures, since breaking even isn’t really the goal in a for-profit startup. Obviously, then, your goal is to break into that top third of startups, right?
As much as you probably don’t want to be thinking about failure when you are gearing up to launch a new business, it is always better (and cheaper) to learn from the mistakes of others!
Chapter 5 -- Why Businesses Fail…And How they Succeed
A quick Google search of “why businesses fail” turns up more than 5 million hits. Most are articles or blogs listing out the top seven or ten reasons the author believes are the culprits of startup failure. Some are actual studies, through the SBA or scholarly research that attempt to break down the factors that seem to trip up new business.
At the end of the day, every single reason you will find boils down to one fundamental problem – poor management of the startup.
The same is true with the vast majority of small businesses that failed during the recession. It’s easy to believe that the economy is the sole reason for all those closed up shops, but the truth is that properly managed businesses are still in operation…in fact many are thriving!
The job of an entrepreneur CEO is to pilot the company, and as any good pilot knows, you have to take into account all kinds of things to keep the jet in the air. You have to understand how the plane works (the operations), but you also need to know where you are coming from and where you are going. You have to keep an eye on the horizon, looking for obstacles or opportunities before you crash right in to them.
When you see something up ahead that doesn’t look right, you have to dig into your memory and knowledge bank to figure out the best way to handle the situation. You have to be decisive and take action if you want to stay in the air.
Those businesses that crashed and burned early in the recession? The odds are those owners just weren’t paying attention. They didn’t tighten up as they saw the sales start to slip, they didn’t respond with the quickness and agility that changes in the environment command.
Most of them also didn’t have a solid grasp of their business’s marketing or finances, and likely had no plans for the future at all, much less a strategy for dealing with potential problems. Without that oversight in place and active, even small changes in cash flow or trends can be devastating.
You have probably noticed all the empty storefronts and commercial space in your town…it’s the same across the country. The businesses that closed during this recession just weren’t managed properly, and the owners probably just didn’t have the tools to know what to do or how to be a professional entrepreneur CEO.
But if you look more closely at your business community, you will notice something else interesting. Many of the businesses that survived the recession have used the slowdown as an opportunity to remodel, expand, and revitalize their companies. They are able to do that because they had built a stable, profitable business model when the economy was good, and were prepared to manage the ship through the economic storm or the recession.
The truth is that there is no magic to launching and running a company that can succeed over the long term, through thick and thin. The secret is just this – the person at the top must have the right skills, knowledge, and tools to pilot around, over and through the obstacles that are sure to pop up over the life of a business.
Top 20 Reasons for Startup Failure
All that said, it is interesting to note the reasons that ex-business owners give for their failures. So, here are the top reasons for startup failures, along with a quick description of what they mean. These first ten are the standard reasons put together by the SBA and scholarly research:
1. Lack of Experience
Does this mean that you must fail miserably before you can succeed? Absolutely not, but you do need to prepare yourself for the profession of an entrepreneur CEO if you want to succeed.
2. Insufficient Capital
Your business will need cash to get off the ground. Period. Handled correctly, finding the money isn’t that hard, but you can’t create something out of absolutely nothing.
3. Poor Location
I am always surprised that this one makes the list every year…location matters, and if you do your homework up front, this is a mistake that’s easy to avoid.
4. Poor inventory management
With the software tools available to help manage inventory, there’s just no reason for this to be here…but folks still have trouble keeping track of what they have.
5. Overspending
Two ways this goes wrong – eager entrepreneurs spend way too much on fixed assets at the get go, and they let the overhead get out of control (like paying themselves a CEO salary before sales get rolling).
6. Poor Credit Decisions
Purchasing on credit is expensive, even when it seems like a great deal. Too much debt can obviously be a problem, but so can the failure to understand vendor terms and the right situations for taking on liabilities.
7. Co-Mingling Funds
Usually, this ends up with the owner using business funds for personal use…never a good thing. Pay yourself and keep the money separate.
8. Uncontrolled Growth
You’d think that a spike in sales would be a good thing, but rapid growth can completely throw off a company and CEO that aren’t prepared to handle it.
9. Competition
Everyone has competition, even brand new ideas, so the excuse that competition caused failure doesn’t make much sense.
10. Low sales
Well, yes, low sales are a problem in business.
If these reasons seem obvious to you, they should! The problem with these “why businesses fail” lists is that they are not actually focused on root causes. These are all effects of poor leadership and poor management within the business.