10 Mistakes To Avoid When Starting Your Business

2013-05-28 10:55

In the year since I founded Problemio.com which is a company that makes mobile applications for business, over 150,000 aspiring entrepreneurs have used the apps and 15,000 actually planned their business on the app.  I often help many of the entrepreneurs on the apps, and I observe the same mistakes being made all the time. In this article I am going to share some of the most dangerous mistakes people make, and explain how you can avoid making these mistakes so that your business can be set on a good path.

1) Not understanding the financials of the business

Yes, I know, finances are boring and often intimidating. But I strongly suggest to focus on the financials of your business and understand them very deeply.  Not having a strong sense of costs, revenue, profit margins, and overall market opportunity is one of the biggest mistakes that can be made.  But don’t worry, we will cover it all in this article.  To start, here is a list of things to watch for:

a) Costs to open the business: These can be creating websites, leasing physical space, buying inventory, getting legal help, etc. Costs to start vary depending on the type of business you have. But one thing is true. You have to know what they are and plan to get them done cheaply enough yet with sufficient quality.

b) Ongoing costs of the business: These can be employee salary, server costs, marketing costs, physical office space costs, etc.

c) Depending on the costs you calculate, what is the revenue needed to break even on a month-to-month basis? It will take a certain time from launch before the business brings in enough revenue to cover monthly expenses. In other words, this is the point when the business will stop losing money. For nearly all businesses, this does not happen right away after launch.

d) After calculating how long it would take to get to various financial and growth milestones, the founders can calculate how much money they need to raise in order to have enough money to get to the point where the business breaks even and eventually turns a profit.

e) Revenue and Margins: The business has to ultimately bring in enough money each month to cover costs. How will the revenue be earned? How many customers are needed to meet revenue needs. What is the revenue/profit per sale?

Most founders (especially young and excited founders) skip over the finances and focus on more exciting parts of the business. But that is a deadly mistake. Not having a deep understanding of the finances of the business will lead to very bad surprises down the road.

Also, sometimes the starting and ongoing costs can be quite high. If they are very high, are you able to raise the money you need? Or is there need to change some parts of the strategy in order to keep the costs lower?

2) Not having a solid understanding of demographics of target customers

Very often, when asked who their target customers are, new and eager entrepreneurs say “everyone.” But it is nearly impossible for a young business to create a product that pleases “everyone.” Additionally, it is also very difficult to market to everyone as in reality most people are indifferent to various products and your marketing efforts will be largely wasted.

Savvy entrepreneurs, on the other hand, can discuss the age, affluence level, education level, lifestyle, behavior patterns, and consumption patterns of their target customers. That way they can make a product that delights that group of people. Plus it is much easier to come up with a marketing plan since it is known exactly who needs to be targeted and where they can be found.

3) Not having experience in the industry of the business

Quite often, people go into business because they have no other choice. Sometimes it is due to a difficult economy and the inability to find work. Sometimes it is because of an unavoidable career change. Whatever the reason may be, quite often people see the business as a way to make money and pull themselves out of the financial difficulties they may be in.

Unfortunately, statistics show that most businesses fail. The failure rate of businesses started by first-time entrepreneurs is extremely high. Even the businesses which do not fail, take some time to make a profit and may even cost you money.

Furthermore, a business requires quite a bit of your time, adds stress, and due to that may put a strain on your family and social situations. So at first, a business is something you give a lot to; not the other way around.

4) Not understanding the type of idea you have

Business ideas are not created equal. I tend to split them into two types of ideas: innovative and commoditized. A commoditized business is something that has been done many times before. Some examples are restaurants, home repair, lawn care business, dentist offices, etc. And innovative businesses are usually new types of technology-enabled businesses such as new website ideas, new app ideas, and new gadgets.

The core difference is that if you are starting a commoditized business, there is nothing about that business you should not know before you start it. It has been done so many times before that you can find the right mentors and information, and get to understand most things about this business before you start.  On the other hand, with innovative businesses, it is often very difficult to know what that business will eventually become. Typically, in an innovative business, what you start with is not what you end up with because you have to keep constantly experimenting and refining your strategy. So planning is extremely difficult because there are just too many unknowns.

5) Worrying that the idea will be stolen

If your idea is innovative and has not been tried before, it can be scary to share the idea with others for fear that they may copy it. No one should tell you whether you should or should protect your ideas. That is your decision since it is your business.  But here are some things to consider when deciding whether you will be open or private about the idea you are working on.

Since an innovative idea needs to constantly change and evolve, one of the ways you get direction for how to evolve the idea is by listening to the opinions and feedback from others. You do not have to take everyone’s advice, but you should definitely give it some thought. Eventually this process will give you further ideas for how to make your original idea even better.

The challenge with keeping your idea private is that you limit the amount of feedback you can get. And the only advantage you get by being private about your idea is that no one will steal your idea prior to you launching the product. But once the product is live, it is in public view. So anyone can copy your ideas once your product is live. Since the topic of protecting business ideas comes up often, I here is a longer article about protecting business ideas.

6) Choosing the wrong or unproven team

Your team must be made up of people who do amazing work, share the same vision, and very importantly, have worked together before. Paul Graham, founder of Y-Combinator, which is the top start-up incubator in the world, constantly talks about how in his incubator, teams which have worked on projects before, have had a much higher success rate than teams who have not worked together before.

Additionally, make sure that all the skill sets you need are in your team, and that everyone does top-quality work. Team member skill sets should not overlap too much, but rather be complementary to each other.  And lastly, make sure you work with good people whom you can trust and who you like. If the business is successful (I sincerely hope it will be), you will need to spend a very long time working with them.

7) Not having a solid understanding of market size

Market size discussion can get complex. For this article, let’s keep it very simple. There are 3 market sizes: small, medium, and big. A small market is approximately under 10 million dollars. That may seem big, but it is the best case scenario number and no one ever gets 100% of the market.  Medium size markets can range from 10 million to 200 million as a rough estimate. Again, this may seem large, but you can not make a billion dollar company in a 200 million dollar market. To make very big companies, you must be in a very big market, hopefully a multi-billion dollar market.

The reason this is important is knowing your addressable market size can help you determine how much revenue you can realistically make.  Also, you can get a sense of the types of challenges you will face.  If your market is big, you will face enormous competition.  If your market is small, then you will face issues where there may be too little revenue to really have a good business which makes the amount of money you ultimately want.  And if the market is mid-size, then you may or may not face the issues I just mentioned depending on other nuances of that market.

So try to make sure you have a sense for the market size you are after as this will influence a large part of the strategy for everything else.

8 ) Not having a solid understanding of market history

Knowing the history of the market you are going after is just as important as knowing your market size. Very likely, there have been many companies with identical or very similar ideas as yours.  Many companies fail and some succeed. So you must know why the companies who came before you succeeded or failed. Learning those lessons will help you understand how to steer your business, and what pitfalls to avoid.

9) Not understanding how to market and promote the business

Marketing and promoting your business is really the lifeline of your business. If you can get new customers, great. If you cannot, then there is no business.

Many people go into a business without a good understanding of how to promote their business. Too often people go into a business with their marketing strategy being to hand out business cards, post on Facebook and hand out flyers.  While those strategies may work for a few businesses, they are often not nearly enough because they do not scale and often do not reach most of the target consumers.

One of the great benefits of understanding your target consumer is that it can become clear exactly how to market to them.

10) Thinking as a marketer and not as a user experiencer

Just about every business owner wants to grow their business, and make as much money from it as possible. That creates a natural tendency to focus on selling as much as possible and maximizing profit as much as possible.  It is a very common experience, but keep in mind that your product is incredibly important. So make sure you are constantly thinking about how to improve the user-experience of your clients, and not just about how to squeeze the most money out of them. Make sure your customers are delighted by your product or service and feel like they are getting a great value. Chances are that this strategy will pay off in the short and long term.

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