About 82% of all startups fail within their first 5 years and I have a theory about why this happens:

  • Most business owners think they know their business models when they’re starting new companies, but they don’t.
  • They think they know what benefits people are more interested in (for example, they end up crafting their marketing messages around their great prices and premium location when people only care about selection and customer service).
  • They think they know what marketing channels are the best to reach their audiences (for example, they end up advertising in the local newspaper classifieds and doing Social Media Marketing when the best way to reach their audience is local PPC marketing and strategic alliances with local businesses).
  • They think they have the right product to sell (and they end up offering red circles when there’s no demand for that but high demand for blue squares).

So, What Should a Smart Entrepreneur Do?
First of all, you need to be humble. Paraphrasing Socrates, “All I know is that I know nothing” is the right approach to starting a new business. Don’t get me wrong, you’ll need to make assumptions in order to plan, but keep your eyes open, listen to your market and correct the course as you go. Especially in the beginning.

Tip #1: Don’t Choose Your Business, Let the Market Choose It For You
I call the first stage of startups “discovery”, because it’s when you’re trying to figure out what the market wants. People spend money on stuff every day. They’re buying that stuff from you or from someone else. Learn what they want and give it to them. It really is THAT easy.

Tip #2: Don’t Put All Your Eggs in One Basket
When you think you know your business you’ll invest almost all your money buying red circles to sell to your customers and you’ll advertise your great prices in the classifieds. But your audience doesn’t read the classifieds. And, those people that do read them don’t care so much about price as they care about selection. Even if you have a large selection, they want a blue square, not a red circle!

The solution is to realize that at the beginning, you’re not trying to be profitable, you’re trying to find a viable business. You need to test different things with as little money and time as possible. Time is a very important factor because you have fixed costs and the longer it takes for you to discover your business model, the higher your chances of running out of money are.
These are some examples of smart things you can do as a startup owner:

  • Instead of buying 100 red circles, buy 25 of them and 25 blue squares, 25 yellow rectangles and 25 green triangles. See which one sells best and get rid of all the others.
  • Instead of getting a big ad in the classifieds, get a tiny one. Start a PPC campaign with $50. Do some Social Media Marketing. And, network with a few local business owners. Figure out what sends you the most business and take that marketing approach to the next level.
  • Try different approaches in your marketing materials. Focus on your large selection first , outstanding customer service second and premium location third. See what generates more sales. When people come to your store and buy, ask them “would you mind my asking why you decided to do business with us?”

Tip #3: Watch Every Penny
When you’re starting a new business one of two things will happen:

  • You’ll discover a profitable business before you run out of money. In this case, you’ll succeed.
  • You’ll run out of money before you find a profitable business.

So, it’s important that:

  • You test the business variables with as little money as possible.
  • You survive for as long as possible while you’re trying to discover your business model. The faster you spend your money, the less time you’ll have to find a viable business. So, think twice before buying that fancy chair or getting expensive business cards.

What do you guys think? I haven’t heard this theory anywhere else and I’m interested to know if you agree with this or not. Please share your thoughts too.