bad business

How can you avoid starting a bad business

In the previous article, How to Become an Entrepreneur, we’ve talked about the most important things to know and which metric is useful to keep in mind when dealing with “doing well in business”. This time we’ll focus on a more practical aspect, after all, the theory is better when applied.

Some of you may have noticed that the blog’s name contains the word “investor”, yet we’re here talking about entrepreneurship, and they may have been puzzled by this. For those who have already set foot in the realm of business, this is certainly not a surprise, but I find the rhetorical question legit so I want to spend some words about it. In my opinion, business is a multifaceted system, with several topics and activities interconnected among them. From here we will discuss mostly the right side of the cashflow quadrant, we will therefore discuss entrepreneurship and investing, recognizing the difference between the two but also acknowledging their strict correlation.

The harsh truth

As I mentioned previously, the amount of people who try to start a new business on a whim is staggering, and so are the numbers of startups failing in the first year: 80% of them do not live enough to see their second year, the remaining 20% will resist another year, and only 60% of what’s left will eventually pass the three year mark. That leads to a crushing 95% companies failing in the first five years. How can this be possible? What went wrong?
There are several reasons that are part of that bone-chilling percentage of failure, but should I point out just one, it would be the emotional factor. By this I mean that the decision of starting a business and the choice of the market were not part of a rational and well-planned strategy, but rather the consequence of a state of mind. Impulsiveness doesn’t get along with making money, and if there is a thing I urge you to do is to learn patience, it will serve you well in business.
A second reason can be found looking at the idea itself. And no, I am not talking about exotic ideas such as “let’s make a company to straighten bananas”, but rather the inability to profitably correlate an idea to a market segment. Let me elaborate: let’s say you love dogs, and you get the idea to open a Pet Store, so you can help all the people who, like you, love the four-legged little friends. Is that a good idea or a bad idea? It’s neither. Ideas are neutral, they are not good or bad per se, it all depends on the effects, or consequences, they will generate. So what’s missing to decide if the idea is good or bad?

What’s missing?

It’s missing data. If you had a folder with statistics showing that the town in which you want to open the Pet Store for dogs, is entirely populated by cat lovers, you’d know it’s a bad idea. On the contrary, if the statistics showed a population of dog lovers, you’d be set for a wealthy business. Sometimes clients do some research on their own, but mostly among friends and family -who are biased, avoid that!- or without taking into account other complementary elements. When you are planning to start a new business, don’t just go with what’s mainstream or what you think will be the next “big thing”, try instead to make good use of all the incredible tools and knowledge available today to determine what people are in need of, and simply offer it to the market: I will write about tools and sources of knowledge in the future. What’s crucial is to not fall into the easy trap of thinking that you can single-handedly force your way through customers’ spending habits, no matter how good is your product/service or how awesome is your company. There exists only one scenario in which it’s possible to force customers into buying something they have not directly need of: it’s a phenomenon called “technology push”, and often seen when giant corporations, that have the resources, simply start producing a certain technology rather than another, usually a previous version, forcefully moving forward an entire segment of the market. It’s the case of the USB ports, for example, when USB2 and then USB3 were introduced, no one really asked for them, they were simply improvements pushed by the tech industry.

Gambling? No thanks

If swaying the opinion of customers was this easy, everyone would be doing great in business which, as you can see, is not the case. A “bad business” is a poorly designed one, and it’s a common error, but there are plenty of ways to avoid it: you can immerse yourself in the study of designing a successful business, you can take a course or you can hire a professional. With all these alternatives, I see no reason to start a bad business, because that would not be entrepreneurship anymore: it would be gambling.
To conclude: always carefully check that the product or service you want to offer is in high demand, don’t try to force your idea on customers but rather listen to their needs and, finally, focus on simplicity, following the great words of the billionaire John D. Rockefeller “The secret of success is to do the common thing uncommonly well”.

This is just the tip of the iceberg, but I think it can give a starting point for those who are planning a new life. Best of luck to you all!