By ASH IDRISY
We have all heard the cliché statistic that 90% of all small businesses fail. It’s not clear to me how this statistic is derived or its original source, but it does feel right. If facing these daunting odds makes you more excited than nervous, you’re probably off to a good start if you’re thinking of starting your own enterprise. However, there are some things you’ll want to think through and quantify before you get too invested.
The first thing to ponder is whether you are imagining yourself at the head of something like a tech start-up or a local mom-and-pop storefront. The goal of a start-up is to move fast and dominate market share with a new tool or technology. After you’ve cornered the market, then you start to worry about profits. The model for a traditional small business is more about slow steady growth over time and doesn’t rely on shiny new intellectual property.
Whichever way you are leaning, one of the biggest hurdles will be capital. The capital requirements for a modern-day tech start-up are in the millions. While it’s possible to start out of a garage like Apple, or out of a dorm room, like Facebook. The reality is that most start-ups will need more resources to really take off. Having more experience with traditional small businesses, I’ll focus more on that for the rest of the article.
First let’s talk about expenses. Assume you want to start a restaurant or a car repair shop. You need to find a location and then have enough capital to stay at the location for a few years. That is, take the monthly rent and multiply by 24, which gives you the cost of staying open for 2 years. That should give you enough time to attract customers and develop a steady line of business. Next, consider payroll.
What about paying yourself or your workers during that same two-year period? To keep things simple, assume it’s just you and one part-time employee, avoiding the added complexity of benefits. How much will that cost? Your business should be generating revenue during this time, but you should start with enough capital to pay yourself and your employees without the revenue from the business, for at least the first few years. Undercapitalization is one of the most common reasons businesses fail. Many never give themselves enough runway to get off the ground.
The examples of a car repair shop or a restaurant are both service oriented businesses. Perhaps this is not what you are thinking, maybe you want to sell car parts instead. That would be a goods-oriented business. The pricing for your product, the supply chain that lets you make or order your parts, the hours of operations, will all fundamentally depend on whether you want to run a goods versus services business. You’ll want clarity on that before tackling the next main topic: demand and marketing.
Who, specifically, is going to buy this? Have you talked to at least ten potential customers? A firm grasp of demand should inform your expected revenue. If your product or service doesn’t have enough demand, no amount of marketing will make up for it. That said, you still need a go-to-market strategy. Most businesses today benefit from some online presence, but that doesn’t always mean a full website. If all you need is a phone number and an email address, a Facebook page might suffice. If your growth comes primarily through word of mouth, social media may actually be a better fit.
If all of that isn’t enough, you still have a few more things to consider. For instance, what will you do if the business fails, how would you manage the debt and a potential feeling of failure? Would starting this enterprise cause you to lose career momentum or relationship stress? What if the numbers indicate you must stay open 10 hours of the day, every day? You can’t work 70-hr weeks for two years.
I’ve mentioned a two-year window repeatedly. That’s not a magic, make-or-break figure, it’s simply more of a stress test. If your business can survive for that period you’re in good shape. In next month’s article, I will go over my own experience starting an online work-from-home consulting company, and how it failed the two-year stress test.
