The statistics are a bit dire: 20% of small businesses do not make it past their first year — and fully half will close their doors before their five-year anniversary. Nonetheless, eager entrepreneurs regularly take the plunge in order to follow the American Dream of owning their own business. If you are thinking about blazing your own path, despite the odds, you are not alone. According to the U.S. Small Business Administration, there are 28.8 million small businesses — defined as those with fewer than 500 employees — in the economy at any given time.
How can you protect yourself from excess enthusiasm and disappointment? Before you leap into a new business venture, consider these five questions:
Many new entrepreneurs end up creating a job for themselves, but not a company that can operate without them in a key position . That’s okay, but if it is not your long-term goal, you need to have a clear vision of how you will scale your business before you begin. Otherwise, you risk finding yourself working hard and taking on more than you should, without either the funding or the people you need to succeed. If you want to work less down the road, you will need to focus on creating a business that can operate with or without you, rather than a so-called “lifestyle” enterprise.
In real estate, the crucial factor in price is “Location, location, location!” In the small business world, the equivalent is “Talent, talent, talent!” Having great talent around you is the key to success. Keep your standards high and be meticulous in choosing those you choose to scale the company with. It is important to note that the skills required to start a company and get it to $2 million in annual sales, and the skills required to scale a company from $2 million to $10 million, are very different. You might get lucky and find people who have both sets of skills, who can stretch with the demands of a larger business, but more likely if you want to keep your original team, you will need to invest in them. For example, Grayson Lafrenz, CEO at Power Digital Marketing created a free 14-week MBA program for all employees interested in growing their general business and marketing skill set to solve this problem internally rather than have to reach outside the company for experts to expand the company.
To attract good talent, consider giving your people equity as part of their compensation packages. A good rule of thumb is to set aside 15-20% of your total equity for your key players. These are the people — regardless of title or hierarchy — whom you can’t afford to lose. You need their talent, and you need to offer something attractive to keep them on board and invested in your vision.
Finally, give yourself the flexibility to take risks and hire people with diverse skills, but don’t rush to fill a role with just anyone. Rather, always align yourself with those who bring something to the table that your current team is lacking and that you’ve identified as crucial to your goals.
It is natural to assume that people are similar to you, but in reality, people have very different tastes, styles and spending habits. When you convince someone you don’t know to buy your product, take the time to talk with them! Treat their feedback like gold, cater to their requests, and consider pivoting to adapt to the market if you find they are part of an unexpected trend. Before you invest a lot of capital to launch your idea/product/service, you must build a solid foundation. The most successful “bootstrap” companies start with a few customers and then make sure they’ve gotten their offering just right.
As the new company on the block, you’ll need to find efficient ways to acquire leads and clients. One of the easiest ways is to go talk to other companies who service the same customer base.
Remember, if you are bringing something unique to the market — not just duplicating what others are offering — there is always room for collaboration and smart partnerships. You scratch their back and they’ll scratch yours. It’s a smart way to do business, and it’s great PR. Think about the competitors in your field that focus on a slightly different niche. How can you complement one another’s work? Could they become your distributor? A potential acquirer? Are their clients possibly yours as well?
Many first-time entrepreneurs don’t put proper focus on having a really smart operating agreement. Assume that you will be successful and structure your operating agreement that way. A strong agreement should include five basics: ownership, rights, responsibilities of members and managers, distribution of profits and losses, how owners can be changed, and how to go about dissolving the LLC. A strong operating agreement will prevent disagreements, misunderstandings and a host of other problems once your company starts to enjoy its well-earned success.
Starting a new business is exciting and energizing, but if you want to beat the odds, these 5 tried and true tips are a good place to start.