Thinking of starting a business?
Buyer beware. The risks are very real.
1 in 4 businesses fail in the first year1. For many businesses, that's not enough time to recoup the initial investment
33% of business fail in year 21.
48% in year 51.
Before you jump headfirst into the starting your own business, be aware of the pitfalls so that you can set yourself up for a higher chance of success.
Starting a business requires unwavering faith that things will work out. Many founders will keep plowing money into their business, beyond what they had planned for (if they had planned at all). The costs can become irrational without boundaries, and so the losses can be very large.
There are steps you can and should take ahead of time to better set yourself up for success and limit the extent of failures. It’s up to you to do the due diligence and preparation so you can both protect and empower yourself.
This guide is designed to arm you with the essential steps that we’ve learned, based on our own startup failures and tribulations. Brace yourself — it’s a long list of action items, but nothing compared to the long, arduous path of starting up.
This phase is all about due diligence. Before you start making the product, take the steps to evaluate if this business idea is a sound one, what resources (time, money, skills) it would take to build it, and if you're able to access those resources.
I once met an architect who had this idea to reinvent the necktie -- for example, a hollowed out tie that looks like an outline of a tie. Since I worked in banking where men often wore ties, he asked me what I thought about it. I politely said no way - bankers are conservative. Their idea of being unique was wearing colorful, striped socks at the time. Part of me thought, what a terrible idea from a person who doesn't wear ties. But hey, he was doing conducting his own market research which was the right thing to do.
Begin by identifying who the market (your target audience) is. What is the problem you are trying to solve for them (painkiller) or the improvement you are making (vitamin) in their lives or over another solution? Putting the customer at the center of your ideation process will help ensure that there's a demand for what you plan to offer. It can also help you size the market to and attract investors.
Ways to perform market research:
Primary research: this is your own research that you gather from your target audience. It includes conducting focus grouops, in-depth interviews and online surveys.
Secondary research: this is the research that already exists.
Do a thorough analysis of your competitors to see what they're doing right and where they're falling short. How will you differentiate your product in a meaningful way? This intel will not only inform your value proposition but could also reveal gaps in the market that your business can fill.
No competitors?
Rarely is it the case that you are the first person to have thought of an idea. More likely, you may not have direct competition (same product), but you surely have indirect competition. For example, Citi Bike is the only bike share company based in NYC, but its competition includes the subway, taxis, Ubers and walking!
Having no competitors also isn't necessarily a good thing. It may be a sign that there isn't enough demand or money to be made for your product. Or, it could mean that it's not feasible to build this product today. Regardless, it'd be worthwhile to understand why there are no competitors, if that really is the case.
Product-market fit is the alignment between what your product or service offers and the demands of the market. Achieving product-market fit means that you have successfully identified a problem or need in the market and created a solution that a sizable number of people are willing to pay for.
It’s an important concept and the number two reason startups fail.
35% of startups fail because of a lack of product-market fit1
The good news is that you can preemptively avoid falling into this category by first validating that you have product-market fit.
How do you do that when you haven’t don’t have something to sell yet?
It’s worth investing the time and a small budget to do this. The knowledge you gain is valuable, because it informs you of your decision outcomes. Read more about decision tree analysis.
At best case, you get a strong response giving you more assurance to commit to this venture. At worst, you may find out the demand is low - not the best news, but you would save a lot of effort money and time. You could pivot to a different idea and try that.
A business plan is your blueprint for success. It should outline the following:
A business plan forces founders to think through the details of their business idea. It doesn’t have to be a 40-page document. It can be a slide deck, a notion page, or other format that works for you. But it should be something that is easy to access and edit, because it will change as you learn more and refine your concept.
While these aren't business plans, these pitch decks from seed-stage startups (who later went on to become very successful businesses) are great examples of how companies define their positioning, business models, USP and other elements of the business plan.
Running out of cash is the #1 reason startups fail2.
38% of startups run out of money
Every business requires investment of capital, both to start the business and to fund operations and marketing. It's essential to know what your financial needs are so you can plan for those costs and procure the needed funding.
Jot down all the one-time costs such as equipment, initial inventory, setup fees, research costs (eg validating product-market fit), prototypes. Then, project your ongoing costs like monthly rent, software tools, insurance, and salaries.
If you are starting a consulting business and work from home, your startup costs may be relatively low. You probably won’t have inventory that you have to produce or purchase, and you might not need office space. But you should factor in costs for office equipment (computer if you don’t have one already, printer), business entity setup fees, website design and hosting, CRM and/email software to manage your client and leads list, etc.
Understand what it will take to break even, when you need to generate a profit, and how you will keep the lights on until you reach that point.
For startups looking to raise VC funding, your milestones will also include the events that help you raise your next round — building a prototype, proving out product-market-fit, demonstrating user or revenue growth, securing partnerships, etc.
Will you have enough money to be self-funded? Or will you be seeking investors or applying for a business loan or grant? You’ll need enough runway to hit those financial milestones on your timeline.
If your business is owned by a mom or female, here's a list of grants for mom-owned businesses.
Get your legal and financial ducks in a row from the start.
Will you be a sole proprietorship, a partnership, an LLC, or a corporation? There are different costs associated with each, and those costs vary state to state. Each structure also comes with its own set of legal implications and tax obligations.
Obtain the necessary permits and licenses for your specific industry. Choosing a business name and registering it is crucial for brand identity and legal purposes.
Your Employer Identification Number (EIN), also known as a federal tax identification number, is necessary for paying federal taxes, hiring employees, opening a business bank account, and applying for business licenses and permits. You can apply for an EIN through the IRS website at no cost.
Similarly, some states require a state tax ID to comply with state tax obligations, which could include income, sales, and payroll taxes. Each state has its own process for getting a state tax ID, so it’s important to check with your state’s tax department or website for specific instructions.
Separate your business finances from your personal ones to keep things clear for tax and legal purposes. This means separate bank accounts and credit cards. Find a really good CPA to set up your books and discuss your unique financial needs. It’s worth the cost and could save you from extra hassle and fees if not done properly.
Your brand is your promise to your customers, and marketing is how you'll communicate that promise to the world.
Your brand is more than just a name and a logo. It's the voice, values, and visuals that will set you apart from the competition. A consistent brand helps build trusted relationships with your audience. It can be the reason why a customer chooses to transact with your business over another.
It's important to spend some time on this, but know that it will also evolve as you refine your idea, get to know your customers better, and discover use cases for how you will engage with them. There are free or low-cost tools to help you get started with a logo (eg Canva) and colors (Adobe Color) so that you can keep your costs down at the start.
Your GTM strategy is a detailed plan on how you will launch your product or service in an efficient and scalable way. It’s where you’ll bring together the elements that you’ve thought through in your business plan:
A website can help you tell your brand story. You can showcase your expertise through case studies, blog content or your portfolio. As a brick-and-mortar business, a website can also help prospective customers verify that you are a really business before locating and visiting your physical address.
But websites might not be critical, particularly if your brand and content live on LinkedIn, Instagram or another ecosystem. A good way to know if you need a website is to check if it’s required in your GTM plan. Check out our article comparing websites with social media and eCommerce platforms.
Websites are relatively easy to build nowadays, but many founders spend upwards of $1,500 on the initial design. Depending on how you are using your website, you may be able to get away with just putting up a quick, simple website and spending the minimum on this.
Set up the technology and physical space you need to run your business efficiently.
From your accounting software to design tools and email marketing provider, choose the technology that will support your business operations and help you scale. There are so many free or low-cost software products available now, that technology has become affordable for startups.
A physical office or shop, on the other hand, can be a significant cost. Do you go for a dedicated space, a shared space or perhaps an on-demand space? Do you really even need a physical space right now? Holding off on securing a space keeps your overhead (fixed costs) low so that you stay nimble and potentially get closer to break-even sooner.
By following this checklist, you'll improve your chances of launching a successful business that you can enjoy running for many years. Remember, planning is essential, but so is action. We’ve talked about some of the largest reasons startups fail, but there is one more:
“Lack of speed is the #1 killer of startups.” - Andrew Yeung
Checklist Manifesto by Atul Gawande: This is a great book about avoidable failures across industries and applications. There are many examples of how a siimple checklist helps individuals and teams navigate complex information and processes while preventing common mistakes. Jack Dorsey also used to give this book to every new employee as part of their welcome package.
Startups Costs by LeHerring: Here we put together the resource on startups costs that we wished we had when we started out respective businesses before LeHerring. With more experience under our belt, we're sharing with excruciating detail the various costs to start up a business even if it's as little as $50 to file to incorporate a business because we wanted someone to have told us this all in one spot.
Local Marketing by LeHerring: Aiming to support small businesses to compete in a noisy and crowded market, we've put together a resource for local business marketing. Even on a shoestring budget, local small businesses can stand out and compete by focusing on these specific marketing tactics that business owners can do themselves.
1 Lending Tree + US Bureau of Labor: https://www.lendingtree.com/business/small/failure-rate/
2 CB Insights: https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf
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