Most Businesses fail… sooner or later. They fail in all sorts of ways: collapsing from the inside, succumbing to outside pressures, etc. In fact, there are far more ways to fail than succeed.
I have been an owner or principal in seventeen companies or partnerships over the past twenty-five years. All but four are dead, merely files in the archives.
Here are a few reasons some of my companies failed and what I learned from the experience:
The deal morphs:
One real estate deal we worked on had us building an assisted living facility and leasing it to a management group. Over an evolution, the project incrementally changed. At one point, I looked back and realized that we had accepted both the risk of owning the real estate and backing the lease. We were our own customer. The partners could walk and leave us. We cancelled the project.
- Lesson Learned: Beware of the “Salami Syndrome.” Each slice may seem an inconsequential increment, but at some point the salami is gone. Constantly ask, “Is this the same deal I started with?” If it’s not, understand that your careful calculations mean nothing. Don’t be afraid to re-evaluate the deal and kill it if it is not what you want.
Cash is King:
It is very easy to run out of money. I worked with a computer services company that had a lucrative contract with a large industry. The price was great, but the client had a 90-day payment period. Ultimately the costs of service outstripped the inflow of revenue. They ended up “factoring” their receivables (selling them at a significant discount to generate cash). This ate into their profit and ultimately they shut down.
- Lesson Learned: Understand your burn rate. Pay close attention to the spread between your payable schedule and your receivable time-table. You can be very profitable, but run out of cash before you are ever get paid. Terms matter. A big contract that requires large up-front expenditures but has a back-end payout can kill your company even if you look great on paper.
It’s all about monetizing demand:
We discovered a significant shortage of Physical Therapists in a nearby rural area. Using relationships with medical knowledge, we started a company that recruited highly qualified foreign-trained practitioners. In the end, language and cultural differences were insurmountable. Every month looked like the month before: numerous good prospects, but no signature on the bottom line. We could not translate a clear need into revenue. Simply put, when the money ran out, we rolled up the carpet.
- Lesson Learned: There is a big difference between demand and “monetizable” demand. It does not matter how good your product is or how big the generalized need for it is, if you can’t get someone to pay you for it. It is critical to understand “all” of the factors, particularly those that might create a hurdle for someone to convert from prospect into a paying customer.
I started the company many aspiring entrepreneurs think they would love to own, a coffee shop and café. It grew quickly and we expanded into catering and opened up a tap room. We honed in on a, then formative, trend: micro-brew beer. In those days, there was only one specialty distributor for the few regional breweries. The chains were tied into the big distributors who only supplied the mass-produced brands. As soon as the demand for craft beer became apparent they began supplying craft-brews to everyone. We lost our niche and a significant source of our revenue.
- Lesson Learned: It is not just demand. Shifts in patterns of supply can have significant impact. It can raise your cost of goods or in our case undermined our competitive advantage. Watch for trends outside your control. They can come from out of the blue and kill an even well-managed operation.
Competition overwhelms you:
As a startup, you’re generally the small guy on the block. I had a business that provided onsite contract CAD technicians to a utility company. We ramped up to almost 40 employees and had a very profitable margin and great cash flow. One evening we find out that a large engineering firm has told our guys that they will be laid off on Friday, but for them to come by their office on Monday and they will hire them back. It was an “at will” contract and the larger firm had wrapped our smaller operation into a much larger contract through which they could offer a significant discount. While I was furious over the shoddy treatment we received and would have liked the opportunity to rebid the work, we had no recourse. In the end, we made money and the business ran its course.
- Lesson Learned: You can be more agile and focused, but sometimes size matters. While we had significant growth, we were not able to compete with a larger, more established firm that had economies of scale. They could deeply discount our business and make up for it on other paid services. Sometimes, the best you can do is accept reality, move on and start again.
Entrepreneurs don’t always play well with others. What drives you to succeed (independence, maniacal drive, and the belief that you are right) can be hell on partnerships. I have had numerous partnerships and have about a 50/50 success rate. It generally fails because of divergent expectations and perception of personal value-added. In other words, it often comes down to money.
- Lesson Learned: Pick your partners carefully. Align expectations. A partnership of equals is easier to manage than a junior-senior relationship. You must be able to accept a partner’s opinion as if it is your own, even if you do not understand everything they do. If you can’t rely on their expertise, maybe it isn’t worth the cost.
So the truth of it is this, “If you are a serial entrepreneur, you are going to have a company fail.” You will pay the tuition. The important thing is to learn from your education.
Want your startup to become an investable company; TurboFunder Can Help!