The stats are grim. Despite all the low-cost, information-sharing advantages of starting up a business in an Internet era, the Small Business Administration reports that roughly seven out of 10 startups will tank by the seventh year of operations.
It is this statistic that altered my work in entrepreneurial education. To help startup entrepreneurs avoid avoidable mistakes, I spend far more time sharing what seven out of 10 entrepreneurs do wrong, rather than what two or three entrepreneurs do right.
Here are three missteps that always create extra stress and money loss for well intentioned, hard working entrepreneurs.
No. 1: Test ideas on friends. I wish I had a dollar for every startup entrepreneur who has said to me, “You are the first person to ever tell me about this issue. All my friends loved my idea.”
One way or another, an entrepreneur’s target customers will determine if a startup idea is really a good business idea. Why not find out before investing in big production runs and advertising rather than after? The best way to avoid costly errors in product or service design is to do more testing with target customers.
No. 2: Stiff Uncle Sam. In startup and fast-growing companies, it’s natural for entrepreneurs to allocate their cash resources to initiatives that will attract more customers or boost profits. When faced with a pressing, time-sensitive decision to put more funds toward business building initiatives or pay tax obligations, too often entrepreneurs will pay their vendors instead of Uncle Sam. Smart choice? Not at all.
Nothing can overwhelm an already cash-starved business more than a quarrel with the IRS. Vendors don’t have the power to go after the personal assets of a company’s officers and directors for unpaid bills like the IRS can for outstanding payroll taxes. And if a company doesn’t pay any of its other tax obligations such as sales taxes, franchise taxes, property taxes or income taxes, then interest and penalties will make the day of reckoning even more painful. Certainly, entrepreneurs should take advantage of every legal deduction to minimize their tax obligations, however they have to file and pay all tax obligations ontime.
No. 3: Invest high; sell low. Investors know that there is a subtle but meaningful distinction between a successful company and a successful investment. A successful company can pay its bills and employees, earn a profit, and serve customers with a high degree of professionalism.
A successful investment, however, is ultimately based on the ease in which business founders can cash out at a price that is well above their investment purchase price – even if it is years down the road. When startup entrepreneurs don’t specifically plan how it will be possible to one day earn a positive return on their invested cash, then their operating decisions end up being fundamentally flawed and out of sync with market conditions.
Just because entrepreneurs may invest $10,000; $100,000 or $500,000 of their personal savings in a business, doesn’t mean that their beloved companies are really worth that much on the open market. It’s shocking to entrepreneurs when they realize they have over invested in their companies and may never see their money back. They say, “I wish I hadn’t spent all that money so foolishly.”
In order for startup entrepreneurs to buy-in low and sell high, they have to study their industry and learn what types of customer relationships, intellectual property and operating margins will lead to a lucrative sale. Then they have to integrate these points of “value” into their operating strategies every year they are in business.
It’s a popular notion to say that getting a new business off the ground is “hard.” I agree is it hard when entrepreneurs have to repeatedly stop what they are doing, correct mistakes, and start all over again.
I like easy. Test your ideas with target customers; pay your taxes on time and don’t over-invest in your company. These initiatives can help make the job of business building, more fun and lucrative.
Susan Schreter is a 20-year veteran of the venture finance community and entrepreneurship educator. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.