Starting a business during turbulent economic times poses an extremely challenging task.
Experience shows that startup business owners have a better chance of succeeding if they follow a few critical steps. By studying why startup businesses fail, it’s possible to establish creative and innovative ways for entrepreneurs to avoid pitfalls.
Research conducted by the U.S. Small Business Administration (SBA) shows that 66 percent of new businesses with employees survive two years or more, while 50 percent survive four years or more and 40 percent survive six years or more. Approximately 75 percent of all new businesses — with or without employees — survive two years or more, about 50 percent survive four years or more and about 40 percent survive six years or more.
Several factors influence the success rate of startups. First, new businesses with starting capital of $50,000 or more enjoy a much higher success rates. Businesses that manufacture something survive longer. Older, more experienced business owners also have a better success rate.
Here are the top five reasons startups fail:
- Insufficient capital: Startups with $50,000 or more in initial capital have a much better chance of keeping their doors open. Once you open your doors for business, the hard part begins. You need to pay vendors, employees and utility providers. Plan on having a minimum of six months cash available to keep the business operating.
- Lack of management experience: Many new entrepreneurs have the passion to open a new business, but lack the day-to-day management skills to run a business. You might love to ski and think you want to run a ski supply company. The problem is, you have no clue on how to operate the business.
- Poor business location: If a customer can’t readily find your business location, they’re going to be discouraged from buying your products and services.
- Poor inventory management: Too much inventory will kill your cash flow. This is an issue many new business owners encounter, yet have no clue how to manage.
- Lack of initial planning: This includes the misuse of personal assets to fund the business, unexpected sales growth, poor sales in the first 90 days of business, understaffing and unreliable vendors. The mantra should be: “Business plan, business plan, business plan.”
Having considered the reasons why businesses fail and sufficiently planned to avoid those pitfalls, here are five creative ways to start a new business:
- Purchase an undervalued existing business: During turbulent economic times, many entrepreneurs are forced to sell their businesses. This creates an opportunity for those with capital to purchase an existing business on more reasonable terms. An established operation is “ready for business” on day one. Business assets and equipment likely already are in place, as are experience employees. There’s an established base of people aware the business exists. In some cases, the existing business owner will provide financial projections from previous years. Business lenders will more likely provide financing to existing businesses.
- Exchange salary for an equity position in the business: Most existing businesses are hungry to hire experienced and innovative employees. Cash-strapped businesses that are growing but need new talent could be willing to exchange an equity or stock position in the company in lieu of a traditional salary and benefits package. This new equity position could eventually transform itself into an ownership opportunity. Consider working part-time at a new startup business while maintaining a regular job to learn the business and eventually make an offer to purchase part ownership.
- The virtual office is the wave of the future: There are many creative alternatives to the traditional office or retail space. The Internet offers a great way to market, promote and distribute products and services. Working from home or using shared office services are other ways to create a virtual office space. What’s more, virtual offices could reduce the cost of your startup.
- Establish alternative and innovative means to gain capital: An under capitalized startup is a losing proposition. This is especially true during turbulent economic times. Gain capital by bolstering your personal savings in advance of starting a business. Friends and family financing affords another option. Friends and family could provide money in exchange for a stock or equity position in the company. The less debt you incur today, the better prepared you’ll be when the economy improves.
- Leverage outside counseling before starting a new business: Make an appointment with one of the many SBA education partners. In Grand Junction, the Small Business Development Center at the Business Incubator Center offers a range of resources. Develop a well-defined and comprehensive business plan, rational pro forma financial statements and a realistic marketing strategy. Studies have shown that entrepreneurs who put a minimum of one year of planning into their new businesses have a 100 percent better chance of succeeding in their new venture.
Greg Lopez is director of the U.S. Smalll Business Administration Colorado District Office. Reach him at (303) 844-2607 or Greg.Lopez@sba.gov.