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
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.
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!
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
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.
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.
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.
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