I’m not a business, and I won’t claim to be. So everything I say about businesses are just my ideas. I’ve seen people run businesses: my dad, my mom, my girlfriend’s coworker. I have read a lot about business, but that doesn’t make me an expert. The furthest I’ve dabbled in business so far is freelance work. I’ve considered starting businesses, I always have ideas for them but never follow through. My problem is in finding just the right one. I know a lot of people say “fail fast, fail often”, and I agree that failing is better than not trying at all, but many of the Silicon Valley people saying this also have lots of money to fall back on if something goes wrong. I just wanted to get my ideas on business out of the way and provide a little background before I begin.
Shark Tank, the Profit, and 4 reasons why businesses fail
I’m obsessed with the shows Shark Tank and The Profit, as I’m sure many people interested in business are. I’ve watched and rewatched them, and, of course, as an outsider looking in, you can see many issues with the businesses that are flops or don’t get deals. There’s the flower shop on season 1 of The Profit, in which the son took over the business after his dad passed. The business made $10k a day yet couldn’t turn a profit. He had to bankroll the company with loans from his mom. He ended up letting Marcus Lemonis (host/investor on the show) spend over $100k to help the business and then turned down his deal for what seemed like nonsensical reasons. This is just one example of a small business in the US, and I know it’s not typical, but I think it speaks to something. Then there were the guys at a toy company (also on The Profit). Their arrogance and belief that they didn’t need customer research is something I think can plague many company founders.
I see these business and think, I could do better. And I’m sure many people watching feel the exact same way. How do these businesses keep running the way they are? How did someone create a business, have their friends and family invest, but not do the work to try to get sales?
I have a few hypotheses about why I think so many businesses fail in the US.
1. Inexperienced business owners
2. Unwilling to ask/get advice or criticism
3. No fear about debt
4. Idea is not unique enough (no differentiation)
Inexperienced Business Owners
Most people starting a business probably have never owned one before. My mom has never started a business, but she went all in on hers. The trouble is, she had no idea of what to do. She did all the things you do that you think you need to start a business: register the business, trademark the name, get business cards, design a logo. All of this was done before she even had a product. I helped out my girlfriend’s coworker a few times and he did something similar. His idea was for a fitness app (I’ll be talking more about this later) and he had already gone out and registered as an LLC, had a business bank account and credit card, and wanted to get a patent (to this day I’m still not sure what it was for). All of this before he even had the money to go find an app developer or asked any potential customers about his idea.
I think this problem plagues many small businesses. It’s a dream of many to work for themselves, make their own schedule, and do what they want in life. I think this is why many MLMs have strong followings of people who don’t even turn a profit. MLMs thrive on the “work for yourself” “no 9-5” mentality. People naively join in hopes of making it rich, although probably 5-10% of those in an MLM actually make enough to support themselves.
Business is the same way. I think people go in with this idea that they will work for themselves and not have a 9-5, and eventually the business takes over. In the E-Myth Revisited, I read about the concept of working on the business, not “in” the business. The author spoke to a woman who longed to open a bakery. She finally opened one, but now was becoming exhausted because she had to be up early every day to bake, then had to run the store, and clean up to close until late at night. She couldn’t take it anymore. This is working “in” the business, and it’s a way to burn out. Many small business owners probably work in this same fashion. They are afraid to cede control of anything important to someone else. The bakery owner had hired a woman who ended up leaving, and now she was afraid to hire anyone else. But without any help, she’d end up burned out and would likely call it quits. Her role should be to work “on” the business. This could be overseeing the employees, negotiating deals to supply her products to restaurants or other places, and drumming up new orders.
Once a business gets big enough, the owner needs to know when to step back, hire people, and start working on their business rather than needing to control everything.
Unwilling to ask/receive advice or criticism
This is a big deal as a business owner. You will receive unwanted advice and criticism from time to time. A negative review on Yelp? It happens to the best of them. It matters more how you handle the criticism than what was actually said. I’ve seen this problem a lot during my time in “reputation management” (fancy term for responding to reviews on TripAdvisor and Yelp). For 1 star reviews, I ask the company how they’d like to respond. Four times out of five, they want to dispute it and try to get it removed. I oblige, and write feedback to the site, explaining what the company told me, to try to remove the response, knowing full well that these sites do not remove reviews. Five times out of five the review remains up (which I knew all along) and I am therefor left to craft a response or ignore (as the owners often want) which is the worst response you can give.
I believe the way this company reacts to negative reviews is how many small businesses might react. They don’t want anyone saying anything bad about their store/restaurant/product/service. The problem is that they don’t take this criticism and learn from it. Or worse, they just ignore it. I would say that responding to a negative review can’t hurt (as long as you’re polite), and it can even change that customer’s view on your business. Sometimes the customer isn’t always right, but that doesn’t mean you need to be overly critical in response.
The coworker I talked about earlier with the fitness app, he would not accept constructive criticism which is why I ended up not working with him. The first instance was my idea to post to Reddit in /r/fitness and ask users what they’d like to see in this particular fitness app, or what they saw was missing in other apps. This guy wouldn’t allow it. He was afraid someone would steal his idea. He wouldn’t even look at the competition. I mentioned similar apps to his and he’d disregard it, he hadn’t even heard of many of the apps I listed. I gave him feedback about his logo (I wish I could post it here, it was awful) and he rebuffed my remarks. He felt that his idea was perfect and would be doing “$2000 a month collectively on the Android, Windows, and Itunes stores” per month. I mentioned that building an app for the Windows store wasn’t a good use of resources, as it isn’t nearly as popular as the other two platforms, but he didn’t agree. I mention the $2k a month he believes he would make, because I know that most apps do not make more than $100 a month, if they even make that much. And charging $1 per download makes it even more tough to get users, as people are so used to free, that to get them to pay $1, you must have an app they HAVE to have.
I feel that his inability to accept constructive feedback will lead him to throw money into this project with high hopes of making lots of money without much work. A business owner, as in any profession, needs to be able to listen to others (especially those with experience), and heed their advice. They don’t have to accept all advice, but they shouldn’t wall themselves off from every criticism or outside idea.
People won’t even take advice from the Sharks on Shark Tank! There are some pitches where every single Shark tells the owner that they need to stop putting money into what they’re doing, and that person tells the camera at the end that they’re going to keep at it. It may be sunk cost fallacy at work, or a strong attachment to something they built, but I can see that it’s hard to admit you failed and to just keep trying. But when you’re putting your family at risk, your home, everything, it can be tough to understand how you can keep going.
No Fear About Debt
This is something I think a lot of people get into quite easily nowadays without thinking through the long term consequences. Taking on credit card debt seems second nature to many Americans. According to Nerd Wallet, the average US household had $129,579 in total debt, $15,355 of which is from credit cards. This is a lot! I feared opening up a credit card account, as I felt I didn’t need it and didn’t want to start taking on debt. I finally got one just last year after realizing how important your credit score is.
I think since we rely on numbers on a screen, and the debt is not physically tangible, it is hard to comprehend. I think if we had to stockpile all our money in cash, and saw that so much of it went missing, we would worry. Swiping a card, taking out a loan, these are all parts of being a consumer it seems.
I believe this is the same with small businesses. It is crazy to hear on Shark Tank or The Profit that some of these business owners have remortgaged their homes, taken out loans, maxed out credit cards, taken from personal savings or retirement, spent their kids’ college money, or borrowed thousands from friends and family. The fact that you don’t see this money in front of you is a huge problem. The money is just a number you see when you get your bank statements or a collection agency letter, or check the bank app on your phone.
It’s a problem. People need to start being more careful with money, especially business owners. I feel sad when I hear that person pitching on Shark Tank mention that they spent $200k on some product which still isn’t making them any money. I can’t fathom where the money goes.
I think we need to become more cognizant about our money. There are plenty of successful businesses out there that started off less than $5,000-$10,000 and are profitable. People may throw money at a problem, because they think that is the solution. Or they may think that to start a business, you have to spend a good deal of money. It’s not true!
The MVP (minimum viable product) is more focused on software products, but it can work for online businesses, or just some idea you have and want to test. If you have an idea, don’t go remortgaging your home or getting a loan to fund it. Test it out to see if people are interested first. Spend a few hundred dollars on Facebook ads or Google Adwords and run some tests. Create a landing page for your business and try to get people to sign up. The more sign ups, the more people are actually interested. Go talk to people! Ask strangers what they think. But don’t take the “Oh, I’d buy it” as a definite affirmative. Many people will say they’ll buy some hypothetical thing, but never actually do it.
Just try something before you go taking money out!
Idea is not unique
This one is huge, and it’s something you probably see daily as you drive or walk around. There are tons of storefronts out there that seem ubiquitous: the laundromat, nail salon, Chinese restaurant, barber, real estate office. People either are passionate about the idea or think they will make lots of money from it. There are lots of realtors because getting the license is simple, and people think they’ll make tons of money. There are many Chinese restaurants because many Chinese immigrants believe that’s their best bet, same with nail salons (usually owned/run by Koreans). Bakeries can sometimes be commonplace because people are passionate about baking and want to work on what they love. Restaurants are also passion projects, as are small coffee shops.
Where am I going with this? I’m trying to say that the reasoning for these businesses don’t make sense. Sure, I love coffee but I know better than to open a coffee shop. The reason is that it’s a tough market. Sure Blue Bottle came around and has a high standing among coffee lovers who turn their nose up at Starbucks, but this is in a big city like San Francisco. In a small town, your little coffee shop will have a very hard time staying open and competing with Starbucks and Dunkin Donuts. You are passionate about coffee, but how will you differentiate and bring in customers?
That’s my issue: differentiation. Many small businesses don’t worry about differentiating from the competition. My mom started her business with no competitive research. She just decided she liked soaps and lotions, and made her own brand. The problem is when someone sees her items, why would they buy it over the myriad other soap and lotion products? The coworker with the app, his idea had almost no differentiation from the competitors I saw.
All these Chinese restaurants, nail salons, barbers, laundromats, they are all quite interchangeable. As are plumbers, locksmiths, gardeners. People start these businesses with little thought about how to compete with others like them. They just assume that people will come to them, when they need to be putting themselves in the customer’s shoes and wondering why someone would pick them over somebody else. Will you compete on price, quality of products, customer service, ingredients, atmosphere?
Starbucks was able to make its way (and charge more) because of its unique atmosphere. You can’t really compare Dunkin Donuts with Starbucks although they both serve coffee. Think about Target and Walmart. You likely prefer one over the other, but why? They’re both huge stores with similar offerings, but one focuses on low prices, and the other focuses on a higher quality.
Your business can’t target everybody. You have to pick your audience whether it’s sneakerheads in college or mom’s with pregnancy scars. You need to tailor your product to them, and know just why people will buy your item over a competitors.
So those are the 4 reasons I think businesses fail. It took me a while to realize each of these points. Opening a business back in the 1700s meant that you either followed in your family’s footsteps or apprenticed as a cobbler and started a shoe repair business once you finished. There was no thing as differentiation, if you were the only cobbler within 5 miles then you had no competition. You likely also didn’t do tons of hiring; you were the owner, the cobbler, the customer service rep, the accountant.
With so many businesses starting every day, and the ease at which you can start one, it’s no wonder we need to learn to differentiate our offerings, work on the business and not in the business, and listen to advice. The ease at which you have access to capital (like maxing out credit cards) means you can sustain a business that should be left out to pasture.
It will be interesting to see how all these online businesses from affiliate sites and bloggers to online courses and digital products & services changes to business landscape from what it is like now. Currently, I see so many people coming online trying to do the same thing everyone else is doing.
“Buy my blogging course”
“Get the 30 day product launch eBook for $99”
“WordPress sites start at $500”
Because it is so easy to find information and learn skills through the internet, the barrier to entry in the online business space is getting lower and lower. It’s never been easier to start a business, but it’s also never been harder to ensure it is different enough from the competition to gain traction (and turn a profit).
I guess where I’m going with this is that I hope future business owners read these 4 items. I know I’m not the best person to take advice from as I have yet to start a business, but I think these ideas are things that people should really consider before quitting their job and starting something. Which reminds me, and this is my last point, don’t quit your day job just yet! Make your side business big enough that you’re forced to quit your job. Don’t put the cart before the horse.