Tuesday, November 20, 2018

Why Businesses Fail



Every day, many businesses fail and end up declaring bankruptcy.  In fact, the American Bankruptcy Institute says on average about 25,000+ businesses went bankrupt each year from 2013 to 2017.  The Small Business Association (SBA) reports that 30% of businesses fail during the first two years, 50% during the first five years and 66% during the first 10.  Only 25% make it to 15 years or more.   

We can talk all day about the liquidity and solvency of a business until our pockets bleed, but at the end of the day it’s been my experience that those excuses are the carcasses of the business that is inevitably doomed to fail regardless.

To me it all comes down to businesses’ barriers to entry and how much passion and drive the entrepreneur has in making it happen.  In a prior discussion I talked about testing, testing and re-testing business ideas with a minimal viable product (MVP) in the post How to Start a Business with Minimal Investment.

However, even some of the greatest minds I know who followed the process sometimes fail.  I took a closer look at these individuals over several decades and even reflected on my own personal business failures.  In my opinion, these are the three biggest reasons why people inevitably fail at business

 They Don’t Know What Game They’re In. 

Often a start-up will have early success during their minimum viable product (MVP) stage.  They often get what Alan Greenspan referred to as “irrational exuberance” and scale up very quickly.  The problem is there are often very large barriers to entry that are not seen while focusing on the product or service development.  They can range from a saturated market, complexity of scaling or distribution, and legal, regulatory and trademark issues to name a few. 

I’ll give you a quick example of one of mine.  Around 2012 I purchased a large industrial building for pennies on the dollar in what was to be a quick flip to net a huge profit.  I did my basic due diligence and purchased the property.  It had no environmental, regulatory or zoning issues but also no current occupancy permit.  A few quick repairs and a paint job and I would be in business. 

What followed was years of pure hell in what turned out to be weekly fights with the county and court dates which inevitably ended in a net loss. Code and building violations that existed on every building in the area were ignored but somehow ticketed on mine.  Why, because they were touted as a weak department and decided to go through an image change, starting with me.  Again, when it came to THAT Building and THAT County, I didn’t know the game I was in until it was too late.

For those of you aspiring entrepreneurs, after you have found a business that works for you and want to blow it up, scale according with bare minimum investment and DO YOUR HOMEWORK.  Hire experts, consultants and accountants.  You can never ask too many questions up front or along the way.

Passion and Motivation

Many people go into business because they hate their jobs, financial situation, their lives, etc.…  Also, social media has told them to quit their jobs immediately and pursue their passions.  After all you only have one life to live and time is running out! 

The personal development industry is worth over 13 Billion dollars a year and growing.  It all says the same shit but millions of bloggers and podcasts push the drug in different packages to make a buck.  It all boils down to the same message.

Get off your ass and start working. 

I laugh at the sheer volume of motivational works on social media.  Stop looking at it.  Find a product or service you believe in and get to work.  Don’t quit your job and don’t fuck up your marriage and starve your kids until you know it’s going to work and you’re passionate about it.  I can tell you from experience you will know.  It’s a feeling that overcomes you and once you get the bug, you can’t stop. 

For those of you who are starting a business it sucks.  Being an entrepreneur is lonely, stressful and I guarantee most of those who ventured out on their own wish they wouldn’t have over the first year or two.  But this is the reason the business fails.  You’re not motivated or passionate about the work.

Capital, Liquidity, and Cash Flow

I hate this one the most because in my fantasy world I believe if you listen to me and do all of the homework upfront and scale properly, Capital, Liquidity, and Cash Flow should not be a problem. 

However, it doesn’t always work that way and each is relatively important.  My suggestion is that after you have a product or service that you are truly passionate about do a shit ton of homework on scaling.  Be conservative and throw in a few pitfalls or percentage for unforeseen costs.

Line up capital for immediate needs but also formalize a strategy for future needs.  Most importantly know when to STOP.  If things go bad don’t be so leveraged that it destroys your life.  In my decades of experience this is one of the biggest reasons people fail or succeed. 

Those successful entrepreneurs had many failures first, but they knew when to stop the bleeding early, cut their losses and move on to the next project.  Those who couldn’t let go and felt trapped, ended up draining every asset until it was all gone.  There’s no shame in failing, as a matter of fact it’s necessary.  But have enough skin and emotional fuel left to move on to the next project.


Good Luck…