If you want your startup to be in the tiny percentage of companies that actually make money, you’re going to have to claw your way to the top. However, that doesn’t mean you can’t make the journey easier by avoiding unnecessary mistakes.
Before setting out to build your own business, do yourself a favor: Gain a solid understanding of the way the business world really works. Listening to a bunch of inspirational podcasts won’t cut it.
I founded Caplinked eight years ago. This was my third company overall, but the first tech startup; my previous two businesses were private investment firms. Today, Caplinked is still thriving. We’ve made it this far in large part because I didn’t buy into the “shoot for the stars” narrative so often preached to aspiring entrepreneurs.
Instead, I did my research. I focused on the data and the facts. Even still, despite doing all that work up front and having more than 15 years of prior business experience under my belt, I learned a few hard lessons along the way — including these five common ways entrepreneurs endanger their businesses:
1. They Don’t Do the Research
Taking a research-backed approach is the difference between truly knowing what you’re getting yourself into and just thinking you know.
Some aspiring entrepreneurs see people succeed in a trendy industry like virtual reality or food delivery and decide they want to join the party. Here’s the thing: Trends are just that. They live and die — often quickly — by unpredictable consumer and investor preferences.
Just a bit of research can reveal the risk, but people instead flood markets because they seem safe or enticing. For example, one of the most common businesses also has one of the highest failure rates, primarily because supply exceeds demand. Take a guess what industry we’re talking about.
That’s right: Restaurants. Research suggests about 60 percent of restaurants shutter within their first three years in business. Furthermore, overhead is typically high and profit margins are often low, making food service one of the riskier business ventures out there. Meanwhile, less “sexy” businesses like mobile electronics repair are generally safer, more profitable bets.
I’m sure most restaurateurs know what a risky business venture opening a restaurant can be before they take a stab at it. However, they probably ignore the risk because, of course, they’re going to be different; they’re going to have a quirky twist, like giant cheeseburgers or a fun conveyor-belt food delivery system. The truth is these trendy ideas probably won’t help a business succeed.
What really helps a business succeed is a great strategy, and research can reveal exactly what that strategy is. Instead of hopping on the trend train, do some digging and crunch the numbers. Find out if your market is underserved or overcrowded. Identify a legitimate, data-backed competitive advantage. Only then should you proceed.
2. They Focus Too Much on Funding
There’s a myth promoted by the media and venture capitalists that if you can keep raising money, you can succeed regardless of whether or not your business plan and product are robust.
Here’s the problem with that notion: It makes you entirely dependent on funding. If your funding stream is cut, your business will immediately collapse because it was never viable in the first place. Looking at your shell of a company, you’ll realize its value was purely based on the dreams and wallets of investors.
Having nothing but ample funding creates a false sense of security, and it also breeds entrepreneurs with no actual business skills. These naive, inexperienced founders don’t understand what it really takes to run a business that doesn’t always have to be raising money to survive.
Entrepreneurs should focus less on funding and more on developing and marketing excellent products or services customers really want. If you’re winning customers, you will get funding.
3. They Don’t Realize How Important Marketing Is
Great marketing is the closest thing to a “business hack” that actually exists. As branding expert Denise Lee Yohn writes in Harvard Business Review, “[C]ompanies must put as much energy and investment into marketing new offerings as they do in generating them.”
Yet few entrepreneurs fully understand that investing in effective marketing is one of the smartest decisions they can make. In fact, great marketing alone can help a lousy business coast along for quite a while. (Eventually, however, a business’s true value will determine whether the company sinks or swims.) On the same note, a business with the potential to be truly great can fail without a proper marketing strategy.
One great example of the power of smart marketing is the energy drink industry. A lot of people find energy drinks distasteful. They are packed with sugar, and they are associated with heart problems. Any benefits they do have can easily be attained with tea and coffee. Despite all that, energy drinks are a $50 billion dollar industry because the brands have smartly partnered with the UFC and other extreme sports and blanketed the shelves of every convenience store with their products.
4. They’re Not Careful Enough About Accepting Money
Taking funding can come back to bite you in unexpected ways.
Investors often refer to their relationships with entrepreneurs as “partnerships,” and founders are often eager to believe what they say and accept their money. However, the two parties aren’t really partners in the way first-time entrepreneurs likely want or expect. As a result, many founders find themselves giving up more company equity or control than they wanted to. In the worst-case scenario, a founder can even be fired from their own company by the investors.
Taking on debt can also be dangerous. Founders often make one of two mistakes: taking on the wrong kind of debt or taking on too much. Secured debt is riskier than unsecured debt, but any kind of debt can ultimately lead to bankruptcy if you don’t handle it correctly. If you don’t have the funds to pay back the debt on the agreed upon terms, you can lose your company and everything you worked so hard to build. Don’t rely on bankruptcy to save you. It usually won’t.
Whenever you accept money in any form, be cautious. Do your research on who is funding you and what strings are attached to that money. Hire a lawyer and pore over the legal documents with them. Make sure you fully understand your end of the deal, or you will probably regret it.
5. They Don’t Know How to Attract, Manage, and Retain Great People
The hardest thing to do in business is attract, retain, and manage great talent. A company’s success is determined by the value of its people, unless it is a purely asset-based business.
Because it’s so tough to attract top talent as a small company, the burden of getting the most out of the existing team and picking up any slack often falls on the founders. There’s research to back me up here: A 2017 report from McKinsey found high achievers are eight times more productive than average employees when working in complex jobs. Think of all the time, effort, and resources you can save when you have an exceptional team. In that light, it’s easy to understand why recruiting is a key factor in a business’s success.
Simply being aware of how difficult it is to recruit and keep great people isn’t enough. It takes years of working with different types of employees, fine-tuning your soft skills, and likely losing some valued talent along the way before you’re any good at it.
All entrepreneurs struggle with these five pitfalls. I’ve been there myself.
I’ve trusted the wrong people, hired the wrong people, let the wrong people stick around for too long, and put mediocre people in important positions. My single biggest problem as an entrepreneur has been getting the right people. You’ll likely have a similar experience.
But don’t worry: Other issues will arise to make things interesting, too. Like debt financing issues. About three years ago, against my better judgment, my company accepted a loan that we shouldn’t have taken. We paid it off and all is well now, but it did put our business in danger. We survived, and my cofounder and I even gained a bit more discipline and perspective because of it.
The moral of the story is that there will always be risks involved in starting and running a company. Limiting these risks is often difficult and sometimes impossible. The key to dealing with risk is awareness. You can’t prepare for danger if you aren’t aware of it in the first place.
In other words, before you can begin to plan effectively to manage risk, you need to gain a solid grasp of the risks you are facing. If you neglect this step, you’re walking blindly, Bird Box style, into a minefield. You can do yourself a favor by taking off the blindfold, even though you may see a few things that will scare you. Better to be a little bit scared and live to tell about it.
Christopher Grey is the cofounder and COO of Caplinked.