Steering a new business successfully through its first five years is not a challenge for the faint-hearted.
Charles Pittaway, who founded Netcash in 2001 to provide payment services to other small and medium business owners, distils the lessons of his entrepreneurial career.
Nobody starts a new business expecting to see it crash and burn. Most entrepreneurs I know believe that if they follow their instincts, use their heads and get their marketing, finance and employment right, they will succeed. But if you go back and analyse the reasons why any business failed, mistakes in marketing, finance and employment are hardly ever the primary culprits.
A lot of companies fail despite having good products, good people and good financial plans. Here are some of the hidden reasons for business failures:
1. The one-man band
Very few successful companies are started by just one person. Everyone needs colleagues to bounce ideas off, talk them out of stupid decisions and cheer them up when things go wrong. When you’re on your own, setbacks can be crippling – but for a team, they can forge a unit of incredible power.
2. No buy and sell agreement
A lot of businesses are started by two friends or colleagues who agree to split the equity and the decision making. Unfortunately, these deals have a history of falling apart, usually painfully and expensively. Sooner or later one partner begins to feel their own contribution is more valuable than the other’s – if there is no mechanism for handling these differences, you’re in trouble. If you do go this route, work out a buy-sell agreement right at the start to govern what will happen in a stalemate. If you can’t agree on the terms of a buyout while you’re still friends, how can you hope to do so when the relationship has soured?
3. Not stepping back to re-evaluate
Failures of judgment at the top have killed more SMMEs than lack of money, talent and information combined. As entrepreneurs we’re often influenced by our sentiments to act in ways that actually put our businesses at risk. It’s absolutely essential to put aside regular time to step back, take a good cold look at what is going on and check whether it still adds up. When you do that, you need to trust the numbers: don’t let your attachment to the business blind you to warning signs of trouble.
4. No plan B
Of course you believe your business will succeed, or you wouldn’t be doing it. But failing to put a backup plan in place is suicidal. What if your product takes twice as long to develop as you thought, or customers buy only half as much? It often takes twice as much time or three times as much money to get going as you predict.
5. Too much money
Oddly enough, too much money can be as much of a curse as too little. It can tempt you to hire people you don’t need, approach problems in ways that don’t focus on the value to your customer, take your eye off the market and weave dangerous inefficiencies into your business. Don’t ever get too comfortable.
6. Not knowing where the buck stops
I love working in flat organisations without lots of structure and hierarchy – it’s one of the reasons I started Netcash. But it would be naïve to think we could survive without some structures and channels for making decisions. When people start looking for direction, they need to know where it’s coming from.
7. Being lonely at the top
Even if you keep an open door and employees know they can give you honest feedback, sometimes you need a trusted advisor outside the business. Your lawyer or accountant is not necessarily the right person – how many of them run their own businesses? Find a mentor or peer group of other entrepreneurs who have faced the same issues.
8. Too much equity, too much debt
It’s tempting to fund a business with debt and keep 100% ownership – but very dangerous. Your bank is not your partner and it has no real stake in the success of your business – if things go wrong it’s got your house, your car and everything you own to fall back on. An equity partner, on the other hand, has got to pitch in to make the business work. As the saying goes, it’s better to have 50% of something than 100% of nothing.
9. One big client
It’s great to have a bread-and-butter client, a big account that keeps the money rolling in. But if you lose that client, your entire business could be at risk. Keep your client base as diverse as possible – and if you can’t, make a plan for what you will do if you lose that account.
10. Forgetting to innovate
One successful product or service doesn’t make a business. If you really have found an attractive market, you can bet there are competitors looking to take a piece of it. Keep on researching, developing, introducing new products and new levels of service. Make the competition scramble to keep up, rather than digging yourself a static position and defending it with everything you’ve got.
11. The enemy within
If you get it right, you’ll eventually have a business that ticks over nicely, run efficiently by managers who know it as well as you do. What happens if they decide to take the entrepreneurial leap themselves? Be alert for the signs and take preventive action sooner rather than later, including revisiting your reward systems if you have to. Giving key managers a stake in the business can be a life-saving move.
12. Seduced by success
Success can do funny things to people, including making them forget what really happened along the way. Rose-coloured hindsight can easily transform luck into rare foresight. Enjoy the success by all means – but don’t forget you still have to meet customer expectations tomorrow.
13. Not knowing when it’s time to move on
At some point in the life of almost every business, the original founder needs to step aside and let someone else manage it. The skills and attitudes needed for a successful startup are very different from those needed to manage a stable, mature company. If you stay on past your sell-by date, you run the risk of poisoning the business. Rather get out while you’re ahead and either enjoy the rewards of success, or move on to a new challenge. Then read this advice all over again.