According to the latest studies, only 10% of the new start-ups will still be in business in five years. This is scary. However, I think that most start-ups that fail do it for the same reason and this mistake could definitely be avoided.
The Reason
Inexperienced entrepreneurs think they can predict their business models beforehand. They think something like, “I’m going to sell my chocolate cakes to people who enjoy great food and I’m going to advertise in the newspaper to find my customers.” A few months later, they’ll probably find out that the chocolate cakes don’t sell as much as the lemon cakes. They’ll discover that it’s almost impossible to sell to end consumers but selling to restaurants and coffee shops really works. They’ll realize that newspaper ads don’t work but visiting restaurant owners in person and leaving them a free sample works great.
My point is that it takes time to figure out your business model. Now, one out of two things can happen:

  • you either have enough money to cover your fixed costs until you figure out your business model
  • or you run out of money before figuring out your business model.

The math is simple: let’s say you starting capital is $10,000 and it costs you $1,000 per month to run your business. That gives you 10 months to figure out your business model. If it takes you longer, you’ll need more money or you’ll have to shut down your business.
What You Can Do to Avoid This
There are a few ways you can greatly maximize your chances of success:

  • Be humble and understand that you don’t know your business model. The market will show you what business you’re in, how you can reach that market and what the market wants.
  • Partner with someone who knows your industry very well. This person will have a much better idea about what works and what doesn’t work in your market. If you’re the industry expert but have never run a business in your life, consider partnering with a seasoned entrepreneur who masters marketing and finances.
  • Start your business with enough cash to run your business for at least one year until you can figure out what works in your market.
  • Keep your costs down as much as you can. The longer your money goes, the more time you have to make your business work. Try to do as much as you can yourself.
  • Test things before investing a lot of money in them. For example, if you want to print flyers, instead of doing 5,000, do 100 and see the response you get. If they work, get the other 4,900.
  • Don’t quit your job yet. I can tell you from experience that owning your own business is a lot of fun but when you can’t pay the bills or buy food, all the fun goes away. A job will provide you with enough income to pay for your living expenses and it will give you some money to run your business. This is a slower route to growing your business but it’s way less scary and I’ve found that most first-time business owners find this route to be a much happier path than putting all your eggs in just one basket.

Now that you know why most companies fail, get out there and make yours succeed!