Words by Wes O’Donnell, Managing Editor of InMilitaryEducation.com
Running a start-up is like eating glass. You just start to like the taste of your own blood.
-Sean Parker
There are many types of small businesses out there in the world. A large part of this series of posts is dedicated to walking you step by step through the process of starting an ecommerce store for minimum cost, including the exact numbers that it cost me to start and maintain my ecommerce store, Modern Workspace, so that you can get a feel for the real-world dollars involved. Having said that, I also cover the starting of a traditional business where you have an idea for a product that you believe the public wants and endeavor to take it through design, manufacture and the sales channels, which can be done completely alone, (at first at least) and which I have done with my more traditional company, MD-Advantages.
The second option costs a significant investment on your part in money and time, but, some would argue, is much more rewarding. On the other hand, an ecommerce store is something that you can run while working at another job if need be and is much more gentle on the wallet, which is, quite frankly, why I’ve decided to focus on it. In addition, I believe that the knowledge that you will build up during the start-up and running of an online store will give you an education that is unmatched in any university and will allow you to transition, if you wish, to a more traditional business after a year or two, and give you a much higher chance of success at the traditional company.
Whichever path you decide is best for your life goals, it’s important to acknowledge some of the most common reasons why 25% of start-ups fail in the first year and many more after the second. There is also a disturbing trend making its way around the start-up community; a myth that has been perpetuated recently because of the high failure rate of start-ups: That myth is that “it’s okay to fail”.
I’ve had business leaders, mentors, friends and family tell me “Wes, it’s okay if you fail.You will learn invaluable lessons to use in your next business and won’t make the same mistakes twice. ”Right… so with all due respect to my circle of supporters, this is only a partially true statement… True there is quite a lot to be learned from failing, and lessons learned from failing increases your chances of success for your next venture. However, let’s make this absolutely clear… it is not okay to fail. This recent trend of wearing failure as a badge of honor is sickening and completely anathema to the military mindset.Let’s face it… You and I just aren’t built for failure.
You should be reading books like this and everything else you can get your hands on regarding mistakes other companies similar to yours have made and learn from their failures so that you don’t make the same mistakes. Let someone else fail for you and your company can reap the benefits.
So what are the most common reasons that start-ups fail?
Reason 1: Failure of the business model
You need to be brutally honest with yourself when it comes to forecasting start-up costs, revenue and expenses in your business plan. This is the stage that you need to dial back the optimism. Over-optimism is a relentless start-up serial killer.
Many entrepreneurs are too optimistic about how easy it will be to acquire customers. They make the assumption that because they make an awesome web site, have a ground breaking product, or provide a service that people can’t live without, customers will fall over themselves to get in your door. This may happen but ultimately it becomes an expensive task to attract and win customers, and for some doomed start-ups, the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV).
For Modern Workspace, because internet traffic builds over time, our first few customers were quite expensive to acquire; all of our early sales coming from paid advertising. After about 3 months, once the site began to rank higher in an organic search, we were able to spend less on advertising to bring the customers in.
So… to review, if you find that you’re spending more money to attract customers than the customers are spending at your store then you will be hemorrhaging cash.Having said that, this is normal for the first 3 months of an online store, so this formula takes on less importance during the early days of a startup ecommerce business.
Reason 2: Running out of Cash money
Another major reason that startups fail is because they ran out of cash. A key job of the Pathfinding Entrepreneur is to understand how much cash you will need to begin with and whether that will carry the company to a milestone that can lead to either a successful financing, or to “critical mass”, a self-sustaining company with cash flow positive.
The real question: Bootstrap your company yourself or find investors?
My personal view…
In October of 2012 I decided to leave my corporate job at a prestigious and stable company where my MBA (paid for by the Montgomery GI Bill) and my work ethic (instilled in me from the military) had earned me a position in mid to upper level management. I had decided, much to the terror of my wife, to quit my job and start my own company. We were living a comfortable life.Why would anyone voluntarily live at the poverty line for perhaps a year or more while a start-up was picking up steam? After all, we had real financial responsibilities: three kids, a mortgage, a new corvette and a bunch of other toys.
The answer, of course, is that I chose financial freedom over job security. I believed, rightly so, that I had the discipline to give up most of my material objects and force my family to live in virtual poverty now for a big payoff later. This, unfortunately, is impossible for a great many people in the younger generations. At the risk of “sounding” old or getting into a sociological debate, we live in an era where people require instant gratification. Technology has pushed us all relentlessly into that mindset, and there’s no going back.As an example, I can raise my phone in the air and have an app identify any song instantaneously. And this is just the most superficial example; the instant gratification mindset goes so much deeper.
So I entered entrepreneurial combat with only a few thousand dollars in savings.I had absolutely no interest in seeking investors in my company, unless the time came when I needed it. I was intent on bootstrapping it with my own money.But why? Wouldn’t it be better to use someone else’s money? Here’s the problem: Once you get someone to invest in your company, you are giving up a chunk of it. When you’re playing with someone else’s cash, they have equity in your business and in some cases, have a say in the direction that you go, and I had no interest in dividing my baby up into pieces. After all, what if the person who now has decision making power in my business turns out to be a jerk? He may not have the same ideals, morals or ethics that I have either.
Once I made the commitment to bootstrap, I had to take an honest appraisal of my finances and set myself up for the greatest chance of success. In addition to having my savings, I sold my Corvette, sold most of my firearms and went line by line through my personal finances slashing all of the non-essential fluff, e.g., do I really need to pay $30/ month for 3G for my iPad? Sure, it’s nice when I travel, but it seems that no matter where I go, I’m always around WiFi. It was a textbook example of how to start a lean company.
With MD-Advantages, an offline business that actually has a product that needs to be manufactured, avoiding investors has been very difficult because of the costs involved.How did I do it? I’ve ultimately merged my ecommerce store Modern Workspace (with its positive cash flow) legally with MD-Advantages so that I could use some of the profits from Modern Workspace to help realize the objectives of MD-Advantages. This would be much more difficult if they had remained separate companies.
Honestly, if your goal is to get started selling through an ecommerce storefront, you don’t need outside investors. And once it becomes profitable, you can move the money around all you like. No doubt you’ll want to put some in your pocket, but don’t forget to plan for growth as well, setting aside a minimum of 15% of your revenues going back into your company.
Essentially you have four places to get money:
Level 1 is friends and family but unless you have an aunt sitting on a large inheritance, don’t expect to get a lot of cash from this source. People at this level will be giving you money based more on your passion than your product and usually the payback terms are interest free or with a small amount of interest attached.
Level 2 is a group called Angel Investors. These are individuals that are wealthy, usually retired and looking to invest as a hobby or in their free time. The amount of money that they will invest could be anywhere from $25,000 on the low end to perhaps $1,000,000 on the high end, although it could vary. Groups of Angel Investors are clustered all over the country and the best place to track them down is through your local SCORE office.
Level 3 is reserved for Venture Capitalist firms that specialize in identifying start-up opportunities and nurturing them through to profitability. The sky’s the limit on dollar amount here if your idea is big enough, your team good enough and your business plan sufficiently prepared. There is so much to get into with VC firms, it could fill another book. Unfortunately, my experience with this group is minimal but I encourage you to check them out if you think that they are necessary to meet your goals.
Level 4 is banks. If you’re a start-up, and if you’re reading this then you likely are, avoid banks at all costs. The document preparation will eat up months of your time, the rejection rate is astonishingly high and the repayment terms are not the best. That’s not to say that you won’t use bank’s money later to, say, expand your business or get a loan for equipment that you need to take your company to the next level. But for start-ups, I have to recommend to you that you avoid them.
Reason 3: Problems with your product
For ecommerce stores you must choose your line of products carefully. We’ll take a closer look at this in a later post about drop shipping, including how to research the demand for the product or products that you want to sell online; as well as how to measure the competition. Unfortunately, for a traditional/ original product company like MD-Advantages, it gets a little more complicated.
Most of the time, the first manufactured product that a startup brings to the marketplace is something that the market doesn’t know it needs. Henry Ford once said “If I would have asked the public what they wanted, they would have said a faster horse”. In the best cases, it will take a few revisions to get the product and market to click.For MD-Advantages, we submitted short surveys with every new modular medical cart system sold, for the first few orders.
With this we were able to gain crucial customer insights in how we can improve our product; from ergonomics to functionality. After all, the modular medical cart has never been done before, so we had no competitors to compare our product against. In the worst cases, the product will be way off base, and a complete re-think is required. This can be avoided by performing in-depth customer research prior to devoting your limited cash and precious time to an unproven product. Before we even began moving the idea of the modular medical cart from concept to actual CAD design, we interviewed over 500 medical facilities to inquire if there was a potential market for our product as well as in-depth research into how they were actively using their current stock of medical carts.
If you’re determined to bring something completely new to the world, be diligent and do your research!
Reason 4: Not Knowing When to Change Directions
The good news is that your competitors, typically large companies, move like a cruise ship. When they make a business change and turn the wheel, they keep going straight for a long time before the ship finally starts to turn. As a small business, you are more like a jet ski; you turn the wheel and BAM! you’re going in a new direction. Unfortunately, some entrepreneurs continue to look down while marching in the same failing direction, right off of the cliff. You need to keep your eyes open for new opportunities and be sensitive to how a particular product is or isn’t selling. This is accomplished by paying close attention to your metrics, real-time feedback loop and the “Perfect Mission Cycle” from the last chapter. You need to know when a pivot is required, while there is still enough cash in the bank and enough time to implement the changes.
You need to constantly test and tinker with your startup until you land on a winning direction.Sometimes that is a big pivot, from a B2C (selling to the general public) to B2B (selling to other companies) focus, for example.And sometimes, it is a small pivot by, for instance, selling into the video game industry instead of the insurance industry. Modern Workspace actually made that exact shift when we decided to get into the game industry, (and it was a great excuse for a weekend trip to San Francisco for the Game Developer’s Conference where our networking actually paid off months later from deals with Treyarch and MLG, Major League Gaming).
Reason 5: No Passion
As an entrepreneur you absolutely, positively must exude passion about your product and your company. You must love your startup well-enough to get through the goods times and the bad. Doing so will allow you to attract the best management team and the best investors, and your passion will rub off on others too. Sometimes you may look or sound like a complete lunatic when getting overly excited about your business. But trust me, it’s infectious and begins to rub off on people around you. That passion will turn you into an Olympic Hurdler, allowing you to clear every hurdle in your lane in record time.
Reason 6: No Mentors or Advisers
Despite what’s portrayed in 80’s action movies or video games, no military members in ANY job goes into combat alone. Entrepreneurs should not be “lone wolves” either. You need to understand you are not in this war alone. Many communities have setup specifically crafted startup environments for them to tap into for mentorship and learnings from experienced entrepreneurs. Why? Because local communities have a vested interest in supporting local start-ups that could bring jobs, products and cash into their communities.
So, what qualifies as a mentor?
A mentor is someone who has been down the same path you’re taking. He or she is experienced, successful and willing to provide advice and guidance, for no real personal gain. In my experience, mentors that are retired can provide you the most time and attention. One of my primary mentors early on was not retired and had to actively work on his own business at the expense of mine. I wasted 4 months and crucial startup dollars, both of which are in short supply in the early days, waiting on this mentor to answer some very basic questions. It is especially unfortunate for me because this mentor was a family member and the mentor arrangement, or lack thereof, irreparably damaged our family relationship. Nevertheless, take my advice and seek a retiree.
But how do I find a mentor?
Government-Sponsored Mentor Organizations
The government offers a great deal of free resources and services to support small business owners, both online and in person:
- SCORE Mentors: Sponsored by SBA, SCORE provides free and confidential counseling, mentoring and advice to small business owners nationwide via a network of business executives, leaders and volunteers. You can connect with a SCORE volunteer through in-person and/or online counseling.
- Small Business Development Centers: SBDCs provide management assistance to current and prospective small business owners. SBDC services include financial counseling, marketing advice and management guidance. Some SBDCs provide specialized assistance with information technology, exporting or manufacturing. SBDCs are partnerships primarily between the government and colleges, administered by SBA.
- Women’s Business Centers: WBCs provides business training and counseling with the unique needs of women entrepreneurs in mind. WBCs are a national network of nearly 100 educational centers designed to support women who want to start and grow small businesses.
- Veteran’s Business Outreach Centers: VBOCs provide veterans with entrepreneurial development services such as business training, counseling and mentoring.
- Minority Business Development Agency: MBDA advisors help minority business owners gain access to capital, contracts, market research and general business consulting.
- Additional federal counseling programs can be found on Business.USA.gov
Trade Associations
Many trade associations operate mentor-protégé programs that provide guidance to help you build a business. These mentoring programs are often conducted through a combination of formal one-on-one mentoring sessions and group networking with fellow protégés. Business owners might be connected with multiple mentors for a more holistic experience.
Most industries are represented by trade associations, as are genders, ethnic groups and business types. If you need help finding a trade association, consult your local SBA district office.
Mentoring for Government Contractors
If your business plans to sell products and services to the federal government as we do at both MD-Advantages and Modern Workspace, you may need specialized mentorship. The General Services Administration (GSA) offers a Mentor-Protégé Program that is specifically designed to encourage prime contractors to help small businesses participate in government contracting. The SBA also has a Mentor-Protégé Program for small businesses.
Look to Your Facebook or LinkedIn Network
Who do you know? Do you have a previous boss who inspired you or a friend who is a successful business owner? Ask that person to be your mentor, and learn from his or her advice and best practices. Just be prepared to share with them why you chose them in particular, your goals and what you are looking for from them.
Working with a Mentor
If you decide to work with a mentoring organization, ensure there is a formal mentor-protégé structure in place. If you work with an individual, you’ll need to establish a mutually beneficial, structured relationship. There are some unofficial rules or best-practices for working with a mentor. After all, they’re devoting their precious time to help you. Remember these tips about mentoring:
- Be organized, prepared and consistent. Make sure you are respectful of your mentor’s time.
- Do not expect your mentor to run your business for you or make decisions for you. You should have realistic expectations about what a mentor can provide you.
- Plan your mentoring sessions in advance. These could be as simple as having a one-on-one meeting once a month to discuss business goals, obstacles and regulatory requirements that you don’t understand.
- Take notes, create action items and be prepared to review progress during your next session.
- Always, always, always thank your mentor for his or her time and assistance with your business decision-making skills.
Reason 7: Bad Luck or Timing
Sometimes, businesses suffer from plain bad luck. Many companies have been taken down due to something entirely out of their control. Sometimes, the enemy sniper picks you. Why? Well, he has to pick somebody.Imagine owning a startup travel business in September of 2001, or a new home builder after the mortgage crisis in 2009, or a new restaurant owner on the Jersey shore just before Hurricane Sandy hit in 2012, or in my case, severely affected by the government shutdown in the first half of October 2013. Modern Workspace’s sales dropped 80% in the month of October because of the government shenanigans! Luckily, we were able to recover. During those times, it is often best to dig a foxhole, ride out the shelling the best you can, and live to fight another day.
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