Advertiser Disclosure
X

Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all banks, credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others.

  • Date

By

Dig Deeper

27,233FansLike
26,505FollowersFollow
43,749FollowersFollow

Become a Money Crasher!
Join our community.

7 Small-Business Mistakes and Reasons Why Most Entrepreneurs Fail

Over one-fifth of small businesses fail within their first year, according to the Bureau of Labor and Statistics. Around half survive their first five years. Roughly one-third make it to 10 years, and around one-quarter of businesses make it to 15.

In other words, running a successful business for more than a year or two is incredibly difficult. Few entrepreneurs have the skill, stamina, and grit to survive long-term.

So what does it take to become the exception to the rule? Why do so many entrepreneurs fail, and how can you avoid their ranks?

As you contemplate going into business for yourself or explore the risks in your existing business, beware of the following common pitfalls and traps.

Most People Start a Business for the Wrong Reasons

Before diving into specific reasons for business failure, it’s worth pausing to note that most people start with a faulty foundation in their business.

Most of us have a woefully inaccurate impression of entrepreneurship. We see only the success stories — because they’re the ones that get reported in the media. No one wants to read case studies about failed businesses. So we don’t, even though they make up the majority of business attempts.

Entrepreneurs tend to start their own businesses for two overarching reasons: money and freedom. They think they’ll earn a great deal of money quickly, and they love the idea of “firing their boss” and working for themselves.

If there’s one thing I’ve learned as an entrepreneur myself, it’s that there are far easier ways to make money than starting a business. Starting a business comes with high risk, with no certainty of getting paid, and plenty of stress. If you want money, there are plenty of high-paying jobs even without a college degree. With a degree, you have even more options to earn a high paycheck.

Options that don’t require the risk, stress, and long hours that entrepreneurship does.

Which raises the second point of chasing freedom. Eventually, if your business survives long enough, you can create a degree of freedom to work when and how you want. But starting a business requires longer hours than working a 9-to-5 job does.

The buck stops with you. You have to wear every hat at first, from marketing and sales to accounting and bookkeeping to actually creating whatever it is your business sells. You work harder than employees work, often with little to show for it at first.

The Right Reason to Start a Business

I once heard an entrepreneurship truism that stayed with me. “If you can imagine yourself happy doing anything other than starting a business, do that instead. You’ll have a much easier, lower-stress life, and probably make more money.”

It’s that simple. If you just can’t imagine doing anything other than starting a business — if you feel so compelled and driven that taking a job just won’t fulfill you — then start a business. But if you have any doubts or any room for feeling happy doing something else, they will become tempting escape routes when the honeymoon phase ends and you realize that running a business involves an endless series of seemingly insurmountable obstacles.

Few people have that endless well of grit and determination. But those who do can find fulfillment in the daily challenges and stresses, rather than just fatigue.


Why Most Entrepreneurs Fail

Businesses can fail for infinite reasons, but most fail because of the same few, common mistakes.

As you set off on your journey toward profitability and expansion, watch out for the following snares and missteps that trip up so many of your fellow entrepreneurs.

1. They Run Out of Money

You know the cynical old cliche that “it takes money to make money.” While not true in the employee world, it certainly holds plenty of truth in the entrepreneurial world.

It takes time for new business ventures to turn a profit. Some businesses can do so within a few months, while others take years to become profitable. But until you turn a profit, you burn through cash. It becomes a race against the clock: can you become profitable before you run out of startup capital?

In entrepreneurial circles, a common metaphor is a plane building up speed on the runway, trying to take off. Often entrepreneurs look for ways to “extend the runway,” to find ways to survive until profitability.

What to Do Differently

First, adjust your starry-eyed expectations. When I first went into business, my father told me “Write out your best, most conservative cash flow projections. Then cross them out and expect it to cost twice as much and take three times as long to reach profitability as you projected.”

You need more money and time than you think because you’ll get hit with problems you can’t possibly foresee. Budget for them from the start, as you review options to finance your new business.

Second, explore ways to reduce your startup expenses. Rather than start a brick-and-mortar business, could you launch a purely virtual business, at least in the early stages? Can you start it as a home-based business? Can you bring on freelancers rather than employees? College interns rather than freelancers? Would international workers make sense?

Third, look for supplemental income streams. That might mean keeping your full-time job while starting your business on the side. Or it might mean taking a part-time job that includes health benefits, or picking up freelance work, or any number of other creative solutions. I started freelance writing as a way to extend my own business’s runway. Years after my business became profitable, I still do it because I enjoy it. And because it gives my wife peace of mind that soothes my marriage.

Pro tip: If you’re looking for additional capital for your small business, consider a line of credit or term loan from OnDeck. They have some of the most competitive rates available.

2. They Conduct Poor Market Research

Imagine going through all the work to create a product or service, launch a business, create comprehensive marketing campaigns, and spend a ton of money on advertising — only to discover no one wants what you’re selling.

Or to discover that someone else is already selling something even better than you can offer.

Most people start a business as a subject matter expert. They know how to create widgets, so they go into business selling widgets. Most new entrepreneurs don’t know much about market research. Or, for that matter, about marketing, sales, creating websites, hiring and managing people, creating business plans, or any of the countless other facets of running a business.

It’s a recurring theme for why so many businesses fail.

What to Do Differently

In doing market research, you must answer two broad questions:

  1. Is there enough demand for the product or service I’m considering?
  2. Is the existing competition meeting that demand to customers’ satisfaction?

To succeed in business, you need both sufficient demand and a way to meet it that your competition isn’t already doing.

That doesn’t mean you have to enter an industry with no competition or with pitifully weak competition. But it does mean you need to offer your own unique solution to customers’ problems that don’t simply recycle what bigger, more established competitors are already doing.

Learn everything you can about conducting market research, since it’s probably not an area of expertise for you. Start with the Small Business Administration’s guide to market research.

3. They Don’t Niche Down Enough

There’s a reason people in the business world keep repeating hokey lines like “the riches are in the niches.” It’s true.

Doing market research and competitive analysis isn’t fun, largely because it bursts your balloon. You realize just how apt your competitors are and how crowded the existing market is.

Too many entrepreneurs aim for the widest possible market — the largest pool of potential customers. They try to be everything to everyone to capture as broad a portion of the market as possible. And in doing so, they play to their competitors’ strengths.

Resist the urge, and go in the opposite direction.

What to Do Differently

Err on the side of niching down to a narrow segment of the market, particularly a group that’s underserved by your larger, more established, better-funded competitors.

In the beginning, you don’t need to earn millions of dollars in revenue like your competitors do to stay in business. Start by serving one small niche in your market, and serving those customers better than any of your existing competitors.

After you start earning consistent revenue and build a name as the go-to provider in that narrow niche, you can expand if you like. But when you first open your business, you need a foothold in the market — a weak point in your competitors’ grip on it.

A deep niche — and one you’re uniquely qualified to serve — is that foothold.

4. They Don’t Know How to Market and Sell

Remember, just because you know how to make widgets doesn’t mean you know how to design and execute marketing campaigns for them. Or how to pick up the phone and do direct sales effectively.

Marketing and sales involve completely different skill sets than whatever you think your core business is. But when you go into business for yourself, marketing and sales become crucial to your success.

Which means you’d better get them right, and quickly.

What to Do Differently

You have two choices as an entrepreneur: you can either learn marketing and sales yourself, or you can hire other people to do them for you.

But most new entrepreneurs don’t have either the money or the expertise to hire an expert marketer or salesperson. Even if you have the money, you’ll be hard-pressed to interview, hire, train, and manage a team to handle your company’s marketing strategies and sales.

When you don’t know anything about marketing, you don’t even know the right questions to ask. That means you’ll probably need to learn marketing and sales if you want to start a business.

Don’t want to do that? Go make widgets for someone else’s company. Or find a partner with a deep background in marketing or sales. But you should put together a comprehensive marketing plan before you launch your business, and collect as much expert feedback as you possibly can.

If you plan to launch an online business, consider content marketing, search engine optimization, and social media marketing as potentially low-cost ways to start marketing your website. But understand that the tradeoff for lower costs is usually longer lead times in seeing results.

Pro tip: If you haven’t set up a website for your business, you can do this quickly through Bluehost. You’ll get a free domain name and hosting that starts at less than $4 per month.

5. They Fail to Get Expert Help

Entrepreneurship is a team sport — even if you don’t plan to hire any employees for a while.

Too many entrepreneurs try to go it alone. They don’t bother finding a mentor or coach, don’t bring on supplemental help for tasks they should outsource, and don’t continuously learn and read within their niche.

As the saying goes, smart people learn from their mistakes; wise people learn from others’ mistakes. And believe me, every mistake you’re likely to make has been made before.

Which means you can avoid making them if you get help.

What to Do Differently

Park your ego at the door and seek the advice of others. Talk to successful entrepreneurs, and where possible, get the advice of the people who are doing exactly what you want to do.

You’ll be surprised by many people’s willingness to help you out as you try to get your business off the ground. Many businesspeople, particularly those nearing the end of their career, have reached a point where they’re ready to give back and help the next generation lift themselves up.

I had a mentor early in my business who had retired and never married or had children. He mentored young business startups as a way to leave a legacy behind.

Check out MicroMentor.org as a free matchmaking platform for mentors and proteges.

But getting help doesn’t just mean getting a mentor. Get help with the many tasks that need doing in your business, because you can’t do everything yourself.

Start with repetitive, mundane, lower-skill tasks you can offload to a virtual assistant. But don’t stop there. Look for tasks that lie outside your core competencies that you could pay an outside expert to do for you.

For example, a bookkeeper or accountant could knock out hours of tedious work each week that you would otherwise have to do yourself.

As an entrepreneur, your time is precious. Protect it jealously, and don’t be afraid to bring in part-time help to save you having to do everything yourself.

6. They Run Into Personal Crises

Not all businesses fail for business reasons. Many fail because of personal reasons, such as health crises, divorce, or a schism between business partners.

Take health crises, for example. It takes incredible stamina to run a business — I know I couldn’t do it with less than perfect health. If a health crisis hit you and you had to stop working or scale back your hours, could your business survive?

For that matter, yours isn’t the only health that could derail your business. What if your spouse or child got sick and needed more care? Or if your family needs better health insurance than you can pay for as a small-business owner? If you have a partner, what happens if they get too sick to work?

Divorce and business partners falling out can also derail your business. Without the financial and emotional stability of your marriage, could your business survive? I doubt mine could. It takes enormous focus and energy to run a business, both of which often rank among the first casualties of divorce.

What to Do Differently

First and foremost, acknowledge the risk. Your personal life can undermine and even collapse your business. That means you need to protect your personal life as part of your strategy to protect your business.

Never go without health insurance. Look into health insurance options for the self-employed before quitting your day job and losing your existing insurance. Make sure your health insurance can meet your needs even if you face a true health emergency.

If you’re married, protect your marriage as an integral part of protecting your business. Set aside plenty of time for your spouse and family, and check in on your marriage’s health frequently.

If you have a business partner, communicate openly, honestly, and regularly. Meet at least once each week to make sure you both remain in alignment, not just in the day-to-day activities of the business but also in your long-term vision for your business.

7. They Run Out of Grit, Passion, or Purpose

You can call it drive, motivation, will, purpose, or any number of other words. But there’s something inside you that enables you to get out of bed every morning and rise to the challenges that the day throws at you.

Most people don’t need much of this drive. They get a steady paycheck to compensate them for going through the motions of their daily grind. It’s enough for them.

Entrepreneurs don’t get a steady paycheck, and their grind is infinitely harder. They face countless challenges that employees don’t, with no guarantees that they will surmount them. Any one crisis could shatter their business — and entrepreneurs face a never-ending string of crises, week in and week out.

Sometimes entrepreneurs simply run out of drive. They know life is easier as an employee, and in the low moments, the simplicity of clocking in to a job calls out like a siren song.

What to Do Differently

Coming full circle, only become an entrepreneur if you can’t imagine yourself happy doing anything else.

It helps to do work that you’re truly passionate about. Stick with what you’re good at and what you love to do.

But beyond your own interests, create a vision that’s larger than yourself. Because when the going inevitably gets hard, you need to call on a greater purpose to keep you trudging forward. Otherwise, it’s all too easy to succumb to the easier route of getting a job.

The Japanese have a concept that proves useful here. Known as ikigai, it loosely translates to reason for being or fulfillment in living. In the West, it’s often presented as a Venn diagram: the intersection where what you love, what you are good at, what the world needs, and what you can be paid for all overlap.

Before you start a business, think about what you can do that meets all four of those criteria. Get it right, and your well of drive will never run dry.


Final Word

We’re inundated with success stories about people who hit it big by becoming their own boss. But when you dig into these stories, you rarely get any type of useful tips on how to become a successful entrepreneur.

More often than not, new business owners fail. But if you avoid the common reasons above, your chances of success go up dramatically.

When in doubt, get expert help from people who have already succeeded. You don’t need to reinvent the wheel, and you don’t need to make every mistake in the book on your own. Avoid the most common mistakes because you’ll make plenty of unique ones in your own business as well.

G. Brian Davis
G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.

What Do You Want To Do
With Your Money?

Make
Money

Explore

Manage
Money

Explore

Save
Money

Explore

Borrow
Money

Explore

Protect
Money

Explore

Invest
Money

Explore