The following is the first of 3 posts from our guest blogger Paul Schoening, President of Plan C. He is bringing a unique perspective on what it takes for a small business to survive. Over the next few weeks, the remaining posts will outline the other survival tips. Enjoy!
In today’s climate, it seems like we are seeing more people start their own businesses. Often this first business is based on something that they are passionate about. That isn’t always a bad idea, but sometimes it can cloud our judgment.
I launched my first startup in 2004 in an industry that was also my passion: Cycling. I assumed if there were enough people like me who were passionate about high-end European bike products, my business would thrive. But just because you like cupcakes, doesn’t mean you will thrive in the cupcake business.
As they say, proof is in the data…
Less than 1 in 3 new companies are still around at the 10 year mark. The chart below shows the proportion of new businesses that were founded in 1992 that were still in business each year for the next 10 years*.
Source; www.smallbiztrends.comIllusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live ByApril 28, 2008
*While these data look at the 1992 cohort of new single-establishment businesses, the failure rate percentages are almost identical for all the cohorts that researchers have looked at. So, these are pretty much the one through ten year survival rates of new firms.
For me, my passion skewed my business planning and although we had great success in the first 2 years, the final 2 were difficult, ultimately resulting in my divestiture out of the business. Technically, we did just about everything right: created a business plan, networked effectively, and continually grew sales. However, we didn’t focus on a sustainable business model that took into account how we’d overcome changes in the marketplace. For me, it was a fluctuating (i.e., rising) exchange rate that we couldn’t overcome. Here are the five, sometimes contrarian thoughts, on small business survival based on what I’ve learned:
1. Don’t build a business plan: Wait a minute — aren’t business plans supposed to be Entrepreneurship 101? What about all those popular books telling you that you can’t get to first base without a plan? Not always. To survive, you definitely need to understand the market. You need to know who your competition is, what are the products/services available in the marketplace, who are your potential customers and what is your differentiating value proposition. But that doesn’t mean you have to create a business plan to achieve that.
One question in a 2002 survey of Inc 500 founders asked whether they had written formal business plans before they launched their companies. Only 40% said yes. Of those, 65% said they had strayed significantly from their original conception, adapting their plans as they went along. That means that less than 15% built a business plan that they followed. In a similar vein, only 12% of this year’s Inc 500 group said they’d done formal market research before starting their companies.
Source: Inc. Oct 15, 2002
More important than a “business plan”, you need a sustainable business model that ebbs and flows with your success and growth. Something that allows you to quickly adapt to new opportunities or threats (i.e., rising exchange rates).
Neither Bill Gates nor Mark Zuckerberg had business plans. They did however create sustainable models for continued growth and survival. To do this, you must understand what drives your business, your profits and your sales – and understanding what the potential hazards are. You can help achieve this by forming a small advisory group who meet regularly to bring a “non-passionate” perspective to the table. These people can provide you with a sounding board so you don’t get stuck in a quagmire because you are only looking at things from your “passion” base.
It is important that this group of advisors has people on it who are willing to be contrarian and point out flows in reasoning and judgment. The group needs people who are willing to challenge your opinion and assumptions. It is also nice to have advisors who can advise you in areas where you are not as strong or familiar (i.e., finance or marketing). Finally, the group needs people who will also bring in ideas and create synergies with other ideas.
Focus on getting the right mix of advisors to take on these roles. Sometimes that means a bunch of people – other times many roles can be filled by just a few or even just one. Make sure that you set up regular check-ins with these people. It doesn’t have to be formal – you can get together with one or two over lunch every month or quarter. You can go to a basketball game with them. But make sure that it happens more than just by happenstance.
Confusing your hobby and passion with a good business model is a common mistake. With my “Cycle Import” company I soon learned that it’s not always passion that creates success, but a flexible business model that is sustainable beyond the terminal 3-5 year window. I could have used a few trusted advisors to help me look out at that time horizon before it was too late.
Please let us know what you think by leaving a comment. Our next blog posting will be up first part of next week…part II.