(But the owners don’t realize it.)
There is nothing we hate more than watching startups fail right out of the gate. In 25 years of watching these “gate crashers” all but a tiny few we knew were going to crash.
Why didn’t we stop them? There is no stopping a person who believes he’s got the talent to succeed. That’s because they think it’s TALENT that makes them succeed. They think it’s a high school sport.
Tom Brady throws footballs for a living, but he hires people to manage his businesses. Managing a business is not about talent, it’s about making smart decisions. This is the biggest reason why so many startups fail right out of the gate.
That is, they’ve already failed before the got started.
Startups fail right out of the gate because the company never had profit potential.
We had a client that opened a bakery in a small town. He called us to help him get bank financing. So, we did a proforma.
A proforma is a prediction of profitability. We told him that not only did he have no chance of success, but he wouldn’t make enough to even pay the rent. He ignored us.
The bank lent him money ($250,000) based on his personal assets. He lost literally ALL of his money. His truck was repossessed and his home, which was part of a rental and corporate owned, was taken away. He spent all of his 401k making payroll.
Our proforma showed, in an average scenario, his business losing $4,000 a month. He lost more because his “baker” couldn’t bake to save his life.
According to the Nobel Prize winning economist Daniel Kahneman, even after being advised that businesses have no chance of surviving, most people go forward with their venture. (1) This is because they over-estimate their own “talent.”
We had a client years ago that manufactured screws. He though he was a genius and made a lot of money. But when he retired, we helped him sell his business to another client. The new owner replaced the old one with a $12 an hour, 19-year-old.
The lesson? Big ego’s can lead to disaster.
If you think failing right out of the gate is just for bakeries, think again.
We knew an ACCOUNTING FIRM that failed right out of the gate!!!
The owner, an ego maniac that drove a Corvette and a Jaguar quoted accounting fees that were higher than big 5 firms charged. Yet his “team” of accountants were twenty-something recent grads who hadn’t even passed the CPA exam.
His payroll was $20,000 a month and his accounting fees were less than half that.
On the other hand, we had one company that FLEW out of the gate.
It was a service company that did cleanups for fires and flood damage. We did a three-year proforma and amazingly, the company hit the numbers with Nostradamus like accuracy.
It wasn’t because of our genius in creating proforma’s. Any idiot can do a projection. It was in the owners ability to figure out what things were going to cost him as well as making sure he had potential customers before he got started.
Startups fail out of the gate because they can’t manage cash flow.
For many small businesses this could have easily been #1. We put it at #2 because so few businesses get past #1.
By managing cash flow, we mean having it come into your account faster than it leaves. It weaves into #1 since a financial statement is nothing other than a proforma after the company is up and running.
In fact, you might want to read our topic, “5 ways to get paid faster,” before you go on.
We had several clients that were vendors, mostly light manufacturing, and sold to large multinational corporations. Large companies are notorious for being slow payers and for having a hierarchy of people that sign off on vendor invoices. This can take months.
We have seen a few very viable companies go bust because they couldn’t manage cash flow and ended up behind with the bank.
Startups fail out of the gate because they can’t market.
The best way to get a handle on this is to go through our page on marketing.
Here are several things companies have told us before they went the way of the dodo.
We don’t have to market, we get referrals.
Our product is the best. Marketing is a waste of money.
Advertising cuts too deeply into our profit margin.
Startups often fail out of the gate because their marketing isn’t customer driven.
We have an associate that is a MONSTER at Facebook ads. These guys could sell snow to an Eskimo. My favorite quote from their CEO is,
“You wouldn’t believe how much money people piss away on useless logos.”
Spoiler alert! The customer doesn’t give a rats ass about your logo, how cute you kids are or how great you think you are. The customer has their own problems.
Startups also fail out of the gate because their marketing and product aren’t coordinated.
You’ll see this by clicking on the marketing page listed above.
All great marketing starts with understanding the customer. Many startups focus on their product or service and hope the customers want it. But the secret is to find the customers wants before you start.
And today, startups have a myriad of tools to do this. There are services like Ubersuggest, Google Adsense, Google Trends, Amazon advertising, E-bay and bank-based selling services.
If you have an idea, you can refine it by finding something close or perhaps the same as your idea. You can use it to enhance benefits or simply to determine pricing. Or, better yet, see how they advertise.
All those little product enhancements are part of your marketing pan.
Startups fail right out of the gate because they make bad investments.
Investing in a business is hard. This is why we advise startups to use our free profit margin tool.
As much as we like to think of investing in a business, it’s more likely you’ll make dozens of small investments in equipment, software, ad spend, the list goes on and on. (New employees are investments because they have to be trained.)
Each investment should be thought through based on its long-term effects on sales and profit.
We had a client many years ago that was an extremely successful landscape company. Aside from the fact that they worked like bees, they bought extremely expensive lawn mowers. They knew almost to the year how long they’d last.
Their maintenance department was like you’d see on an Airforce base. Their shop looked like you could perform surgery in it. They knew how sharp the blades on the mowers had to be to minimize engine wear. They knew how long the engines would last. They power washed their trucks and equipment obsessively.
They ran 40% margins on $2 million in sales. We’ve never seen a landscaper come close to this.
The owner never graduated from high school. His son barely got out. The financials were run by the owners wife. They had zero debt and spent tens of thousands of dollars a year on equipment.
Your startups investment decisions are not just financial.
This is why so many accountants fail in startups.
An investment decision for a startup should be thought of as an asset that depreciates over time. Every year, after you buy it, it gets older and wears out. (Accountants love to tell you that depreciation is a “paper loss.” It’s not. Things wear out and when you have to replace them, they usually cost more.)
Several times we’ve seen startups, especially in manufacturing, that bought very expensive equipment for jobs that would only last a short time.
One company that made missile parts bought a $100,000 CNC lathe (A machine that cuts metal) for a job that lasted six months. After the job was completed, the machine collected dust.
If you’re in a startup, you probably LOVE it. This is why you started it and spend every waking hour working on it. This can cause you to WANT neat stuff.
We’ve seen this so many times with farms. Who doesn’t want that shiny new John Deere? Well, that $200,000 loan isn’t going away anywhere near as fast as the shine!
We’ve seen farmers go belly up with million-dollar robotic milking parlors and methane recyclers. As the famed motivational speaker Anthony Robbins one said,
“Most people think being broke is having no money. Believe me, you can blow right past zero.”
A good example of an investment was Donald Trump’s tax return.
The one released to the public. Even a novice investor could tell that in the year in question, Trump sold a property. His “self-employment income,” was not self-employment at all. It was a recapture of prior-year’s depreciation on the property he sold. His annual tax bill, which NOBODY saw was listed right on the return as his prior years tax withholding.
His tax-exempt income was probably from investments in public housing, which he was known to be an investor in.
My point is, given the resources the media had at its disposal, you’d think they would have picked up on this. Since a tax return doesn’t show how much Trump owed on the mortgage, he could have actually LOST MONEY on the investment but still paid taxes on “gains.”
The mere mention of Trumps name turns normally sane people into raving banshee’s. But the lesson is, making business investments is hard. Besides marketing, it’s the most difficult thing you’ll do. The entire world’s financial system is structured to help you take on debt. A word to the wise.
Many startups fail out of the gate because they don’t realize how much they have to do.
You’ve heard the expression, “chief cook and bottle washer?”
Doctors and Dentists go under all the time.
Did you ever stop to think how much labor goes into running a clinic?
In any medical office, the office manager is GOD. They run the show. They are often more important than the doctor. They’re in charge of invoicing, paying bills, the vacation schedule, the list goes on seemingly forever.
Startups fail because the owner has too many jobs.
The first time the issue of “tasks” came up for me was years ago when I was at a business seminar. The speaker said we should make a list of the tasks we do, and color code them.
I thought it was the dumbest thing I had ever heard. That was then and this is now.
The list isn’t a to do list. It’s really an exercise in figuring out what YOU have to do and what you can hire someone else to do. As John D. Rockefeller once said,
“I’d rather have 1% of 100 peoples effort than 100% of my own.”
As heartless as that may sound, you don’t have unlimited time.
As a business owner you have to think.
We once had a client that owned a very large sawmill that he inherited from his father. He was a hard worker. He went bankrupt.
He was probably the most frustrating client we ever had. Accustomed to working his ass off, he never stopped to try and run the place. He called us in to help him get a bank loan. We went through an exhaustive proforma process (Our invoice ended up in the bankruptcy as zero recovery) and told him not to borrow the money.
The fact was he wasn’t profitable before the loan and new equipment wouldn’t change that. In fact, I have no idea why the bank lent him money.
His company wasn’t profitable because HE was inefficient. The company needed what we refer to as “Systems engineering.” In fact, we brought in a systems engineer. He ignored him.
To read about systems engineering click here.
Systems engineering can best be described as efficiency on steroids. You can’t do systems engineering if you’re working 70 hours a week sawing logs, a job you can hire out for $15 an hour.
To read “Is your company a business or a job” click here.
Startups fail out of the gate because they are mind frozen.
One of my favorite comedy’s is “Planes, Trains and Automobiles,” with John Candy and Steve Martin.
In it, Candy plays a salesman that sells shower curtain rings. When they run out of money, Candy has to sell them at the bus station and continues to remarket them as different things, such as hand-crafted earrings.
In fact, as bizarre as this sounds, big Pharma does this all the time. In fact, Candy probably missed his calling as a drug salesman.
Big pharma will take a drug that’s approved for something like hemorrhoids and market it as something for acne. They don’t give a shit. A sale is a sale. My daughter was once given an acne drug where the side effect was birth defects in her future children.
If you can convince somebody that having a mentally retarded child is better than a zit, you’re a better salesman than I am. (Hers was a doctor)
Marry a person you love. Divorce an idea you love.
There’s no sense beating a dead horse, but even a dead horse can be used to make dog food. Just because your idea doesn’t fly, doesn’t mean it can’t be turned into something that does.
Amazon started out selling used college books.
Apple made computers.
Henry Ford started out making bicycles.
The proforma I did for the sawmill above went out of business, but in my proforma, I told them that their only real profit came from selling mulch. Today, that’s all they do. They sell bulk mulch to the state.
There are times, in any startup when your only friend will be Homer Simpson.
Well, it will seem that way.
Many years ago, when I first started out, I busted my ass trying to get customers. I was getting about one out of twenty calls. Then, totally out of the blue, a total stranger sitting next to me in a sports bar signed a $40,000 contract.
There are times when every startup owner thinks their life is simply a cruel hoax. Other times, you feel like Jeff Bezos.
But in the end, there are simple core principles you must know.
Thinking Fast and Slow. Daniel Kahneman.
