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Tuesday, December 10, 2019

Why Many New Businesses Fail and What to do About It

Many people dream of starting their own business ventures. These people dream of wanting to become their own boss and not have to work for others. Moreover, starting a business on the side may help a person build different sources of alternative income in order to generate more wealth and have a lifestyle that many dreams of. The vast majority of wealthy people started businesses and built them from nothing. In the last 20th century, businesses and fortunes have been built by people like Bill Gates, Mark Zuckerberg, Sam Walton, and Larry Ellison. These people started with almost nothing and became wealthy by building their businesses from scratch. Knowing the benefits of owning your own business inspires me to have something of my own, aside from just working at my dad's home appliance manufacturing company. I am currently working on my own side business ventures such as my finance blog that you are reading right now, and my other online venture such as my online e-commerce business called Cash Flow Hobby. Starting a business that turns out to be income-generating assets is awesome since it can give you the freedom to pursue other things in life. However, the problem arises when the business venture actually fails. According to the Small Business Association (SBA) states, 30% of new businesses fail during the first two years of being open, 50% during the first five years, and 66% during the first ten years. The SBA goes on to state that only 25% made it to 15 years or more. These high percentages of people who fail in starting their own business have lost not only their valuable time but the money they have invested in their business.

I personally have seen many businesses opening, and end up having them close in just a matter of time. I'm not here to discourage you readers from starting your own business, but to create a successfully running business is not simple. Even my business ventures such as my finance blog and my online e-commerce business that I'm currently working on the side is not generating me any income (not a single dime). This shows that starting a business is not as easy as it sounds. To create a successful business requires huge dedication and strategy. Even my dad, whose manufacturing business is now considered to be successful, has to undergo many challenges and difficulties to be where he is right now. In this article, I would like to share with you readers the reasons why many new businesses fail and what to do about it to prevent them from making fatal mistakes that can turn your business venture into a nightmare.

Reason 1: No Demand For the Goods or Service (Market Problem).
The first reason why new businesses fail is that they run into a problem of they are little or no market for their product or service that they have built. This is a big problem since how are you even going to generate income if you can't even sell the products or services. Their products or services are not compelling enough to cause potential clients to commit to purchasing. An expert sales rep will tell you that in order to capture the market in today's competitive condition, you will need to find buyers that want and need your products or services.

If you don't have products or services that people actually need, then you will find trouble selling. For instance, my brother and I were bought a computer and printer by our dad back in the year 1997. We were amazed by the awesome program it comes with, for we were able to make our own custom Christmas cards on the computer and have them printed with our printer. At that time, my brother and I were still really young. I was only seven years old, and my brother was 12 years old. However, my brother and I were trained to be business-minded by our dad at an early age. Knowing the potential of having an awesome device (computer) at that time, we came out with an idea of trying to sell our own Christmas cards to our neighbors. So we had brochures printed to advertise our products and had those brochures spread out in our neighbors' mailing box. We waited patiently for a potential client to call us to purchase our Christmas cards, but not a single person called.

This was actually a no brainer, why would anyone even buy a Christmas card from us when they can purchase one that is printed more professionally themselves from the local store. In addition, the cost of having a printed Christmas card from the computer cost more than buying one from the local store. Bear in mind; this was during the 1990s, and printer colored ink cartridge was expensive. My dad and mom were supportive of the business idea even though they knew that it was a silly business idea, but I guess they want us to gain business knowledge and experience from trying. Anyways going back to the point, the business didn't even work, and we actually wasted money for printing those brochures with our printer. This funny story shows that if you don't have products or services that have potential demands, your new business has a high potential of failing.

Another reason could be due to the wrong market timing. Your products or services might be a brilliant idea and could be ahead of your market by a few years; however, consumers are just not ready for your particular goods at this point in the stage. For example, WebTV was a company that founded internet-connected TVs back in the 1990s, but their business sadly failed. This is because, during that time, people did not have excess to fast internet networks like we do today (October 2019). Furthermore, the internet was a luxury during those times (the 1990s). I remembered back in the 1990s, paying a high monthly price to be able to excess the internet, and that is only using dial-up service. I was always frustrated even to browse a web page since it takes forever to load up, let alone to stream video online. WebTV had a brilliant idea; however, they were too early to enter the market.

Meanwhile, today, it's common to see people stream movies or shows on TV that are internet-connected. In fact, it's actually more common to see people watch videos on the internet compared to just watching non-connected internet TVs nowadays. This shows that even if you have a brilliant idea, but entering the market at the wrong time could also be a fatal business mistake.

Reason 2: Business Model Failure.
After spending a long amount of time analyzing hundreds of people who start a business, I realized that one most common cause of failure is due to a wrong business model. Many startup entrepreneurs are too optimistic in regards to acquiring customers. They assume that because they create a new website, product or service would attract many customers. Yes, indeed, they may probably get few customers during the starting process, but after that, the business rapidly becomes an expensive task to attract and win customers.

In many cases, the cost of acquiring the customer (CAC) is higher than the lifetime value of that customer (LTV). This shows that in order for a new business to do well, it requires getting customers for less money than they will generate in value of the lifetime of their business. Yet despite that, I see many entrepreneurs failing to pay enough attention to figure out a realistic cost of customer acquisition. Because of this reason, many new businesses actually spent more money to sustain their business, which, of course, runs a deficit in their business model.

It is best if you understand the essence of the business model. A simple way to focus on what is essential in your business model is to be able to answer these two questions.
 - Are you able to scale your business to acquire customers?
 - Are you able to monetize those customers at a significantly higher level than your cost of acquisition?

Being able to answer these two questions can be very helpful. If you are able to scale your business, this shows that your business is able to handle a growing amount of work or sales incapable, cost-effective manner. A great example would be the finance blog I'm running right now. Yes, despite knowing that my finance blog generates almost nothing from Google Adsense, I was able to create this finance blog at the cost of almost nothing. I had developed the blog using the Blogger engine, which is free for anyone who wants to start up a blog. Also, I have created the logos, templates, and contents of the blog all by myself. This helps me create a business model that cost me almost nothing to start with. I'm also very cost-efficient in operating the business. Having the benefit of hosting my website with a free blogging engine, I don't have any monthly operation cost of having my blog running. The only cost that I have to endure is the cost of the domain name of www.dividendgrowthbunny.com that I only pay $10 annually using GoDaddy service.

My finance blog business model is based on the traffic of the blog. The more people visit my website and have them also to click the ads that Google Adsense provides enable me to generate income. As for now, the way I scale my finance blog business is to promote my blog through an online source such as social media, group chats on smartphones, any other methods of marketing my article contents. Using these techniques, I was able to promote my finance blog free of charge. Furthermore, since my finance blog is related to stock investing and analysis, I'm also planning to contribute stock picks related articles on Seeking Alpha. I would then be paid a minimum of $40 per article I contribute to their web platform. I would also make an additional $0.01 for every single visitor who visits the content (desktop only). The downside of contributing articles in Seeking Alpha is that I'm not able to post the article on any other site after contributing it to them (not even my blog). However, I found a solution to this problem. My plan is to have a short brief introduction of the article content to be posted in my finance blog and provide a link to the content that I contribute to Seeking Alpha. This creates a synergy to my earning potential. Not only would I be earning money from my finance blog from Google Adsense, but I would also earn a minimum of $40 for each stock pick article I post on Seeking Alpha. Temporarily, I won't post content in Seeking Alpha yet since I want to practice my writing skills in this blog first. When I've become a better writer, I would then start writing stock related articles in Seeking Alpha.

Moreover, I also have a future plan for my finance blog to generate additional income from YouTube videos content (Google Adsense) and a dedicated online shop that sell my own potential books and accessories such as clothes, paintings that are related to an investment topic. I have already placed the links to my future online shop and YouTube Channel in the Menu column of my finance blog. I'm planning to use a cost-cutting strategy to create my YouTube videos content and personal online shop for my finance blog. Also, I'm planning to learn how to create videos with video editing programs. This will help me learn new skills as well as create video content at the cost of nothing. Aside from future YouTube videos, I am also planning to use the e-commerce platform I already have to sell investment and business inspiration accessories and products. I am going to use the Shopify since the platform was already grandfathered (free of charge) when Shopify just started their business venture back in the year 2006.

Furthermore, I might plan to join a venture with a friend of mine whose business niche is the same as mine. He has a blog similar to mine and has linked his course website to his blog. He is trying to sell his courses for people who are interested in becoming a value investor. I might work something out with him in order to share his course platform with me. This way, I also can create a course of my own. The benefit of me joining up with him is that we can cut the monthly cost of using the teachable platform. Since we are sharing one platform account for the same purpose, we can share the monthly expense to two people. Working together with him can also help us to create more value for our customers who are interested in our courses. After all, having two people working together is always better than working alone. I hope using my skills, cost-cutting methods, and marketing can help me create a successful business that is capital efficient. I like my finance blog business to be capital efficient because I want my business to stay afloat even when there is no cash flow coming in.

Reason 3: Insufficient Capital (Running out of Cash).        
The third reason why many new businesses fail is that their business runs out of cash. The most important for a business owner or starter is to understand how much cash is left and whether the company prospect can lead to a positive cash flow business. I have seen many new businesses eventually fail because they were not able to maintain their overhead costs anymore. They have many overheads and expenses to run the business. Let alone; they also have invested a vast sum of money on creating the business in the beginning.

Let us take a simple illustration of a restaurant/bar business owner who wants to open up a new restaurant/bar branch. The business owner needs to invest in starting capital in order to start the business. The person invests in cooking supplies, renovation for the restaurant bar, tables, utensils, etc. If the restaurant owner is not careful, he might spend more than what is needed, and that can lead to having lesser money for the future business operation to run. Remember, even after the business owner finished opening the restaurant bar, they still have overhead and expenses of running the restaurant/bar.

What I encounter that most new business owners face is expecting too much when the business just open. They think that there will be a lot of customers coming into their business (Reason 1), and when there are no clients coming in their business, this when the problem arises. Not being able to cover the monthly operation or overhead cost eventually will run a deficit in the business. The business owner will either need to use the spare money the company has remaining or keep injecting new money into the business to stay afloat.

If the business owner is not able to pay the expenses or overhead for the business operation will then result in having the business close. It is imperative to ascertain how much money your business will require. You need to know not only the costs of starting your business but the costs of staying in business. It is important to know that many businesses take a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for those costs.

I suggest starters who just enter the business field to always start from small. This way, you can get the feel of starting a business, and if the business does not work out, you won't lose much money. In my personal journey business experience, I have lost money in a business venture due to a lack of experience. However, I didn't lose much since I always start small. I learned skills, knowledge, and experience from my mistakes. It's fine to make a mistake, but remember to be careful with how much you are going to invest in starting the business.

Moreover, I see not only successful new businesses but also analyze other peoples' new businesses' mistakes as well. I personally have seen many wealthy young adults whose parents gave them capital (money) to start a new business that eventually went bankrupt in no time. This is because young adults have not much experience in running the business and thinking that having lots of money to start with can result in creating a successful business. This is a fatal mistake. Remember losing money in a business is an opportunity cost in which money can be used to be invested somewhere else that gives a decent annual return.

This is the reason for my finance blog you guys reading right now; I am so focused on cutting corners when it comes down to building and managing expenses for this business. You want your business to be cost-efficient so that you won't have to go through the trouble of running out of cash if the business is not getting the potential clients. Do not be too optimist when starting a business; always remember the worst-case scenarios. This doesn't mean for you to be pessimist, but to instead be strategic when opening and starting a business.

You need to calculate and analyze carefully how the business going to be built and run. Like I mentioned above, since my finance blog business is built entirely by myself, I was able to cut costs, such as hiring someone to make the logo or the website for me. I'm glad that I also gained new skills and experience in making a website during the process. I developed new knowledge to use Adobe Photoshop, which I use to make the logo. With the new skills I learned, I also can use them in the future as well. This gives me the leverage to create things on my own when I need to scale up my finance blog business. For example, with my Adobe Photoshop skill, I was able to create my own posting content that I used to market my blog on social media. I was able to edit the picture and add attractive font titles to the picture I'm going to use to market in social media. This way, my eye-catching postings can attract potential viewers when they see them. They were able to understand what the article content is going to be about when they see the posted pictures on social media. 

Reason 4: Lack of Focus & Premature Scaling.
Having a lack of focus in the business is why many new businesses fail. You will need to be focused on what you are doing. It can be in almost anything in life that you are trying to pursue. Do not get distracted with things that are not important that stop you from moving ahead. If you are seeing yourself putting more hours in a coffee break, networking, recruiting advisors, going to conferences, spending more time on the public relations and social media before you got the right products for the right customer, then you definitely need to stop what you are doing.

These are the silent killers of the potential of your new business. Focus on one thing that you are doing before you go to a different idea. This can also include scaling your business to another business idea too early. When you jump from one idea to another idea, this can be a problem. You end up not finishing the task you are trying to pursue. The main goal of a new business is not to be an early stage business anymore. This means getting a good product or service for a good market and knowing how you can consistently acquire new customers for less money than the revenue that is coming into your business. Premature scaling can result in your new business to overhire workers and have unmanageable customer acquisition. With unmitigated growth, problems are more likely to come and become more difficult to fix down the line.

This actually happened to me, as well. I was distracted with so many business ideas that I lost touch on what I am supposed to be focusing on doing. For instance, I initiated this finance blog back in the year 2015. I was writing very little content for the blog at that time, and in a very short time, I end up deciding to try another business idea that is not related to my finance blog. I end up having things done only halfway. This really upset me because I end up only having multiple unfinished projects.  
After knowing that I only get things halfway done, this is the reason why my main focus now is to write articles for this blog before scaling my business to different ideas such as creating YouTube content, online courses, and an online e-commerce shop for my blog.

If you have been following my blog, you readers know that I am only going to start other ideas after I actually finished writing a thousand articles in this finance blog. After I finished accomplishing that goal, then I will start making video content on YouTube, an online shop, or courses for my finance blog. It's fine to have an idea of what you want your business to be in the future. However, complete each task and goal one by one before jumping to another expect of the business.

I learned this after I see this myself with my dad, who successfully made a home appliance manufacturing company. Even when he always wanted to make his factory into an industry that creates many different home appliances products such as stove, rice cooker, and other home appliances, he focuses on creating one product before he jumps to another product. For instance, he concentrates in making his electric fans to be good for the consumers before trying to do other things for the business. He sets a goal that needed to be done and focuses on that particular task to be completed before moving to another idea. This way, he actually gets his task to be successfully completed.  

Reason 5: Poor Management.
Many reports on business failures are due to poor management. It is considered being the number one reason why many new businesses fail. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. If the business owner does not recognize what they do not do well and try to seek help, the company will eventually fail and go out of business. To solve this problem, a new small business owner can educate themselves on skills they lack, hire skilled employees, or outsource work to competent professionals.

Even after your new business is running, it is essential to regularly study, organize, plan, and control all activities of your business operation. This includes the continuing study of market research and customer data. A successful manager is a good leader who creates a work environment that encourages productivity. He or she has the skill of hiring competent people, training them, and can delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make transitions, and envision new possibilities for the future.

I think having a lack of experience and skills is the reason why my dad does not entirely let my brother and I handle his company. He sees that we are not entirely ready to handle his tasks and responsibilities. Running a business is not as easier said than done. It requires a good leader that has the skills and experience in running the business. That is the reason why my dad wants my brother and me to follow him to work every day. This way, we can learn new skills, experience, and knowledge that we cannot learn from a book or school. After all, my dad was the one that established his business from scratch. He must have the experience and knowledge to run his business since he was the one that created it. I believe that having me follow my dad every day to work gives me the opportunity to learn something valuable in the business world.

The Bottom Line. 
Starting a business can be a good way to create a new alternative income coming into you. However, be wary that many new businesses fail within a few years. So remember not to put a huge sum amount of money to start with if you are still inexperienced. But this doesn't mean you should be a pessimist in starting your own business. You won't get anywhere if you don't start something at all. You want to be cautious when starting a new business venture. Take note of all my reasons why many new businesses fail and what you can do about them. You want to know if the products or service you are going to provide is going to be in demand in the market. Having products or services sold without any potential consumers' purchasing can result in you to have a failing business. In addition, make sure that the business model for your company is strategic and scalable in order to stay afloat. Without being strategic with your financial plan for your business can result in your company to run out of cash. You would end up having the business close and lose capital (money) that actually can be used in other investment ventures.

Moreover, always remember to stay focus on one task before jumping to a different idea. This includes scaling your business startup too early. However, this doesn't mean you should stick with only one idea for your business, but to actually finish the tasks of one idea before moving to another idea. This way, you won't get distracted and actually get the task done. Last but not least, remember that to have a successful business running, you are required to have proper management. A good business owner has the skill of hiring a competent worker, training them, and can delegate. They are also able to make strategic decisions on running the business in order for the business to stay afloat. Without proper management in place, it will just be a matter of time before the business fails. I hope this article you readers can learn the mistakes why many new businesses fail and what you can do to make your business startup successful eventually. 

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