The Deadly Mistakes Entrepreneurs Make

A large organization can make a large mistake but their momentum will carry them past it and their reserves will patch up the damage. When a smaller entrepreneurial business makes a big mistake, it’s frequently enough to kill off the business. Here are six big mistakes entrepreneurs have made that proved fatal:

1. Share-of-Market Revenue Projections

It’s relatively easy to calculate how big the market is for a particular product or service. Many start-ups base their projections on gaining a certain percentage of that market, but that’s the wrong way to go about it. A new entrant into an existing market starts with zero and has to build up its share one sale at a time, often having to grow the market to survive. Those already in the market have a significant advantage and won’t give up their revenues easily to a new entrant.

2. Basing a Business on “the Big New Idea”

If you’re entering a marketplace where you’re certain there’s no competition you’re probably heading for a tough time. Be honest and admit that most areas of business have been explored to some degree, often to the point of extinction. Having just one idea to put in play is a “life or death” scenario, and given the 80% failure rate for start-ups it’s almost a guarantee that the business won’t make it.

3. Starting a Competitor While Still Employed

Many employees suffer an entrepreneurial seizure and convince themselves that they can start a similar business to the one that’s employing them and do it better/make more money, etc. There’s only one problem and that’s when the current employer finds out about it and gets a good lawyer. In most legal jurisdictions an employee can’t start up a business that competes with their current employer, nor can they use proprietary knowledge or trade secrets from their current or former employer to start a new enterprise without risking a very expensive lawsuit.

4. Starting a Business to Serve a Key Customer

The entrepreneur in any salesperson will instantly respond if a key customer says something like: “You know, if you could get a supply of widgets I’d buy all of mine from you directly and you could make all the profits your boss is now getting”. It might sound like a goldmine but it’s placing the start-up on a dangerous footing from day one. It might work for a while but unless the business quickly adds other new customers it becomes vulnerable to any changes in its relationship to the key customer. Any business with a single customer that represents 80% or more of turnover is in trouble, but may not yet have realized it.

5. Excessive Optimism

Entrepreneurs have to be optimistic but they also need a good dose of realism when doing their financial calculations. Failure to consider the downside risks can bring the business to a halt quickly. If a start-up expects to have its product on the market in six months and have sales growing at 20% per month for the next six months with a gross margin of 70% the numbers may look rosy. But when it takes ten months to bring the product onto the market and growth runs at 10% a month on a gross margin of 40% the cash flow figures will be a disaster  and most entrepreneurial businesses have no plan whatsoever for such variances. They fail not because the idea was necessarily bad but more than anything because their forecasting is poor and the capital dries up.

6. Letting Sales Drive Expenses

Rising sales are a trigger for many entrepreneurs to add personnel, get a better office, buy new furniture and replace those old PCs. The break-even point of the business starts to climb as does the cost of fixed overheads, and that makes the business much more vulnerable to any downturns that may occur. Successful entrepreneurs see their businesses grow but limit expenditures to those that pay a return — non-productive spending is still curtailed. Save that for the big public companies who are spending other people’s money and think it’s alright to waste it.

These mistakes are six of the best, but they’re by no means a comprehensive list. You can add such other causes as failure to get (or follow) legal advice, hiring people without checking them out first, ignoring industry benchmarks, and really believing the world beats a path to the door of a company with a better mousetrap.

Thanks heavens for entrepreneurs. Thanks especially for allowing so many to survive despite the horrendous  and often fatal, mistakes they make when they bring exciting and untested enterprises into the marketplace.

Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.