Starting a business may pose some challenges, but the rewards that come with it are undeniable. But, finding success with your new business startup isn’t easy. In fact, an SBA (US Small Business Administration) study finds that 20% of business startups fail in the first year and a whopping 70% fail within the first decade. While industry experts point out errors in the way this data was calculated and others point to failure rates of up to 90%, the inevitable fact is that many times when a worker decides a business startup is right for them, it ends in failure to thrive or doesn’t meet the goals of the workers. The reasons behind this high number of failures are shown in the image below.
As you can see in this graphic, marketing has a big impact on failure since the lack of a market for the business accounts for close to half of all business failures. When you add other failure factors related to marketing, such as poor product, product mistiming, ignoring customers, and poor marketing, you can easily see that much of the failure of a business startup comes not from financial issues, but a poor understanding of marketing concepts.
And, while money is another reason why a business startup might fail, especially cash flow, the overarching focus of most advice given to entrepreneurs deals with obtaining financing rather than acquiring marketing talent. I’m here to fix that. I started a series I call Entrepreneurship 101 and you can access all the posts related to that topic by selecting the link or searching for specific advice to guide you regardless of the stage of your business startup by using the search bar on any page of the blog.
COMING SOON! A YouTube series on Entrepreneurship along with short TikTok snippets to share the things you need to know to make your business a success.
Business startup failure
The failure rate of new businesses varies widely depending on factors such as industry, location, economic conditions, and the definition of “failure” used. It’s important to note that failure doesn’t necessarily mean complete closure; it can also include businesses that struggle to generate profits or do not meet their initial goals.
While precise statistics are challenging and subject to differences of opinion, studies, and research provide some insights into the failure rates of new businesses. Here are a few statistics that are often cited:
- The SBA: According to the SBA, about 20% of new businesses fail within the first year, and around 50% fail within the first five years.
- Bureau of Labor Statistics (BLS): The BLS reports that approximately 20% of new businesses fail within the first two years, while around 45% fail within the first five years.
- Statistic Brain Research Institute: According to their research, the five-year survival rate for new businesses is around 50%, meaning that approximately half of all new businesses close within this period.
It’s worth noting that these figures are general estimates and can vary based on industry and other factors. Some industries may have higher failure rates, while others may be more resilient. Additionally, the success or failure of a business depends on numerous factors, including management skills, market conditions, financial stability, and effective business strategies that aren’t considered in these statistics.
While the statistics might appear discouraging, it’s important to remember that many successful businesses face initial failures or challenges before achieving long-term success. Entrepreneurs who are well-prepared, adaptable, and committed to learning from their experiences have a better chance of navigating the challenges and increasing their likelihood of success.
Building your business startup
It may seem like there are a million things to do if you want to build a business startup so it’s hard to know where to start. My advice, based on the causes of business failure shared above, is to start by determining what type of business you should start. Once you know what type of business fits your skills, experience, marketing demand, and the amount of investment of time and money required for each type of business, you’re in a much better position to ensure success once you actually open your proverbial doors. It’s also a great idea to seek advice from experienced entrepreneurs or work with a business coach who can provide valuable guidance. If you don’t have access to any of these folks, you can visit the nearest Small Business Development Center (commonly found at local colleges and universities). Staffed by paid counselors with experience in helping individuals who want to build a business startup and a host of resources offered by the SBA, these centers offer a variety of services including one-on-one consulting and seminars all free of charge. That’s where I got my start in helping entrepreneurs. Ultimately, starting a business is a personal decision that requires thoughtful consideration. With the right mindset and approach, it can lead to a fulfilling and successful career with an above-average income potential.
1. Why build a business startup?
There are lots of reasons to consider building a business startup despite the risk of failure, so it’s not surprising that people are attracted to starting one. In the US alone, about 4.4 million new businesses are started each year, as you can see below.
Here are a few reasons why folks are willing to exchange risk for the benefits of owning a business:
- Above-average income potential
- Supplementing income from other sources
- To help solve a problem or support a cause
- Freedom to control your own destiny
- Want to be fairly compensated for your efforts
- To pursue a passion
- Build generational wealth
Whatever the reason, if you’re considering starting a business, here are the 20 questions you should ask yourself before jumping in.
2. What is the best type of new business to start?
The best type of new business to start depends on various factors, including your interests, skills, market demand, and financial resources. Here are a few considerations to help you determine a suitable business type:
3. Personal interests and skills
Choose a business that aligns with your passion and expertise. Starting a business in a field you enjoy increases your motivation and chances of success. Also, you need an objective assessment of your skills to identify where you need to hire or enlist others to help you build a successful business. If you worked as an employee for a firm in the industry you’re considering, you have a wealth of useful insights into what it takes to drive success.
Many of the most successful businesses today were started when the founders branched out from another company. That’s the story behind Adobe. Its founders developed the initial program that became Acrobat while working for a company. The company didn’t want to pursue the opportunity, so the founders went out to make their fortune with the blessings of their old employer.
Passion isn’t enough to build a successful business startup, you need skills and experience. That’s why many business owners start their journey by learning the ropes as an employee for someone else, as the Adobe founders did, or starting small as a gig worker until
Running a business takes a variety of skills. Some you can easily outsource, such as accounting and legal. Others are harder to outsource as they’re an integral part of what makes up your brand. That might involve intellectual property like the coding behind Facebook, engineering as you find behind innovations at 3M, or marketing superiority like at Mcdonald’s (originally a small restaurant, Ray Krock built the fast-food chain into a Fortune 50 company through his marketing vision).
4. Market demand
Identifying industries or niches with growing demand helps ensure business success. Conduct market research to understand consumer needs, trends, and competition. Look for gaps or underserved areas where your business can provide unique value. Social media, Google Trends, and other online information are great places to start when finding marketing demand.
The reality is that consumers don’t buy products, they buy solutions. And, social media offers a window into the way consumers live their lives and the problems they encounter that act to stimulate insights into new products you might offer to achieve success. If users in a community complain they don’t have access to healthy food options, you might consider opening a store that sells fresh produce. If users complain that they don’t like existing options for XYZ product, you have some ideas of what might work. If you see users modifying or sewing clothing to suit their needs, you might find success in offering this product. I had a student who sold shoes, which I thought was a crazy idea until he told me that some shoes are in such demand, that he can buy them in one area and ship them to customers in another area who can’t find them. He also refurbished second-hand shoes for his market. He’s very successful with his venture although it’s pretty unconventional because he recognized an unmet need out there.
5. Profitability and scalability
Consider the potential profitability and scalability of your business idea. Some industries may offer higher profit margins or have better growth prospects than others. This issue fits with the one above, as profitability is limited by market demand. Competition is another key aspect of profitability as the existence of strong competition makes any business venture riskier, especially if your business doesn’t possess a clear competitive advantage over existing products. As depicted below, competitive advantage makes your job easier compared to the competition. Some ways to achieve competitive advantage include:
- Lower costs
- Brand equity
- Intellectual property
- Skilled, knowledgeable, and dedicated employees
- Enhanced access to raw materials or contracts for other inputs for your products
- First mover advantage
- Technological superiority
6. Unique value proposition
Economists like to melt down consumer decisions to price but that isn’t accurate. Consumers make buying decisions based on the value they perceive in the offerings available and price is only one aspect of calculating value. The trick for building a business startup that succeeds is knowing how to position your value against the competition, which means knowing your target market.
A unique value proposition (USP) is related to competitive advantage but it isn’t so much about what you have but how you communicate your value to consumers. By knowing your target market(s), you can position your brand to provide value that’s meaningful to them and different than the value provided by competitors. Apple’s commercials for the Mac are a great example of building a USP. Basically, a Mac does the same things in much the same way as every other computer. Yet, a Mac commands a price premium over other well-known computer brands because their USP involves a “coolness” factor that eludes PC makers. Below is an example of how the brand communicates its USP without having to go into a bunch of technical stuff most users wouldn’t understand or appreciate.
7. Resources and budget
Evaluate your available resources, including financial capital, time, and skills.
- Some businesses require a significant upfront investment, while you might start others with minimal funds.
- By the same token, some are appealing to investors, including crowdfunding sources like Kickstarter, while others don’t have as much appeal.
- You might start a business from home with minimal initial investment or you might need a larger budget for a staff and a location to rent.
- A business in the gig economy is possible in your spare time so you can keep your current income until you reach the point where it’s feasible to quit it.
- Leverage allows you to reduce upfront costs by borrowing, leasing, and hiring gig workers so you don’t need as much money upfront.
- Of course, financial resources are only one limiting factor. Skills are another factor to consider before determining what type of business to start. Take time to acquire needed skills through training, education, or finding partners willing to invest their skills before you start your business.
8. Lifestyle considerations
Reflect on the type of lifestyle you want to have as a business owner. Some businesses may require more time and effort, especially in the early stages, while others offer flexibility and work-life balance.
Ultimately, the best business for you is one that combines your passion, market demand, profitability, and available resources. Conduct thorough research, develop a comprehensive business plan, and consider seeking advice from mentors or business professionals to increase your chances of success.
9. How hard is it to start a new business?
Starting a new business can be both exciting and challenging. The level of difficulty varies depending on several factors, including the type of business, industry regulations, market conditions, and your experience as an entrepreneur. Here are some general challenges you may encounter when starting a new business:
10. Planning and research:
Conducting market research, creating a business plan, and developing a strategy require time, effort, and attention to detail. It’s crucial to understand your target market (generally we refer to these as market personas as they’re more in-depth than just demographics and geographic variables), competitors, and financial projections. The more information you use to build your planning documents, the more prepared you’ll be to start your business so don’t rush this key element of a business startup or make superficial plans based on your own assumptions. You need objective evidence from trusted sources like the government, consulting firms, investigative reporters, and industry reports. If you need help crafting these planning documents, you’ll find lots of help on this site or reach out to the SBA for more information.
11. Financial considerations:
Starting a business often requires upfront capital for equipment, inventory, marketing, and operational expenses. Securing funding or managing your own finances can be a challenge, especially if you lack access to significant resources. We provide more detail on this question in an earlier section.
12. Legal and regulatory compliance:
Depending on your business type and location, you may need to navigate various legal and regulatory requirements. Many of these involve some cost and it’s best to get professional advice to avoid problems. Again, the SBA can help.
- Most locations require licenses and some industries require licenses specific to that industry. For instance, hairstylists require a barber license to ensure they protect customers against pathogens like lice and bacteria on styling tools.
- You must register your business name unless you plan to use your legal name. Your business also needs its own tax number unless you plan to fold the business income into your personal taxes.
- Speaking of licenses, some industries require education or training. For instance, a CPA requires courses and passing an exam while getting a license to drive a truck also involves training.
- You should consider what form of business works best for you. Your decision has tax consequences, so keep that in mind and consider hiring an attorney or CPA for advice.
- A corporation helps protect your assets in case your business incurs liabilities such as debts or injury.
- Sole proprietorships and partnerships allow more flexibility but may increase personal liability as the income and debts flow to the individuals.
- There are also variations within each of these business types, like an S-corporation.
- Regulations control much of what happens in businesses. For instance, the EPA sets limits on some industries to protect the environment and OSHA has rules to protect workers.
13. Building a customer base:
Attracting and retaining customers is vital for any business. Developing effective marketing and sales strategies, building brand awareness, and establishing a loyal customer base can be challenging, particularly in competitive markets. That means you need to budget money for marketing, including advertising. Below, you can see some recommendations for how much to budget.
Of course, marketing is more than just spending money, you must spend money on the right things and say the right things. You also need to ensure customer satisfaction if you want to grow your business startup. You’ll find tons on this site to help with those decisions.
14. Operational management:
Running a business involves managing day-to-day operations, including production, inventory management, hiring employees, and ensuring smooth workflows. This requires organizational skills and the ability to adapt to unexpected challenges.
One of the biggest challenges faced by entrepreneurs as their business grows is knowing when to add staff and how to let go so the staff they hire can apply their skills effectively without interference or undue bureaucracy that slows the business down.
15. Uncertainty and risk:
Starting a business involves a degree of uncertainty and risk. Economic fluctuations, market changes, and unexpected obstacles can impact your business’s success. It’s important to have a contingency plan and be prepared to adapt your strategies as needed.
Part of your business plan should include research to help you predict these fluctuations so you can include handling them in your planning process. For instance, if an economic downturn is predicted, you might adjust your buying or delay hiring new workers as a way to limit your risk. If consumer culture is changing, you might phase out existing products and begin working on new ones. No one could predict the emergence of a pandemic in 2020 but firms with a strong e-commerce platform or that could quickly pivot to online were in a better position to weather that storm. A business near me quickly stopped making whisky and switched to hand sanitizer to handle burgeoning demand.
Some things you just can’t plan for. In that case, you should develop contingency plans that allow your business to handle the unexpected with well-conceived plans rather than chaos.
16. Work-life balance:
Entrepreneurs often face long hours and a heavy workload, especially during the initial stages of starting a business. Balancing work commitments with personal life can be challenging, requiring discipline and effective time management.
Conclusion
While starting a new business can be challenging, it also presents opportunities for personal growth, creativity, and financial independence. Surrounding yourself with a supportive network, seeking guidance from mentors, and continuously learning and adapting to market conditions can help increase your chances of success.
OK, so that’s not the full 20 questions. That means you have a chance to ask your own questions, using the comment section (you’ll find a link at the top of this post). I’ll edit this post to include your questions in the near future.
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