Tips for Small Businesses
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Date: May 26, 2015
I hold it true, I heed the call;
I feel it though my ship has sailed;
‘Tis better to have tried and failed
Than never to have tried at all.
–F.S.B. Owner’s Lament
(With apologies to Alfred, Lord Tennyson)
Memorial Day reminds us to remember the people who died while serving in the United States armed forces. Yesterday we took a moment to celebrate and acknowledge their sacrifice and contribution to making our country what it is today.
With that in mind, today I thought it fitting to memorialize the many embattled small businesses that despite a dedicated entrepreneur’s best efforts ended up failing. Many seeming reputable sources routinely quote the “80% of small businesses fail in the first year” stat, but research shows this pessimistic prognostication to be untrue. Though the true statistical odds of small business success are hard to pin down, according to this Small Business Administration FAQ sheet, about 50% of small start-ups last 5 years, and about a third last 10 or more years—statistics that have changed little over time.
There are articles, books, posts, videos and profiles in abundance for those few stories of small businesses succeeding spectacularly and becoming mega-businesses (Facebook, Apple) and of small businesses being acquired for huge sums by large companies (see Biggest Startup Acquisitions of 2014). We don’t hear as much about the hardworking small business owners all across the country—from web designers, to medical clinics, to cleaning services, tax preparers, martial arts schools, and event staffers–who strive day-in and day-out, good economy and bad, to keep their companies strong.
We hear even less about the failures. This is unfortunate, because a failed small business is almost always a Phoenix. And whether it softly fizzled out or went down in spectacular flames, the failure can be used as a lesson that will enable future success.
It is no wonder that there are so many serial entrepreneurs out there—most of whom have only achieved that one unlikely success after multiple colossal failures. In fact, one of the things that ultimately makes these people so successful is their ability to learn from past failures and use them as positive stepping stones for future endeavors.
Why do small businesses fail?
The details are as varied as are the small businesses themselves; and failures are rarely attributable to a single factor, but there are a few common large-scale themes. A tip post from last year, Learning from Small Business Failures, discussed some statistics. A more recent research report from CB Insights, The 20 Reasons Startups Fail, analyzed 101 case studies of failed startups. The following chart highlights those reasons:
The 101 companies studied were all tech industry start-ups, as that is the market CBinsights covers, but the failure reasons identified broadly apply to small business of all types.
Small Business Failure Examples and Lessons Learned
The following are several examples of small businesses that failed, and specific lessons future entrepreneurs can use as learning points. These lessons can also help you ensure that your current small business does not fall victim to the same misfortunes, continues to thrive, and becomes a member of the exclusive Small Business Success Club.
The Elizabeth Anne Bed & Breakfast / Just Moulding
The Elizabeth Anne Bed & Breakfast opened in 2003 and closed in August 2011. It was initially successful, and the owners refinanced their mortgage in 2007 to fund renovations. When the economy tanked, people had less discretionary income for vacations (revenue for the B&B fell 21% in 2009), and the owners were unable to make the new loan payments. The property was foreclosed and the business closed.
Just Moulding sold and installed decorative molding in houses. It started as a single small workshop in 2004, became successful and decided to take on investors and sell franchises in 2007, and closed in April 2011. Again, the recession slowed sales of a “nice to have” product like crown molding. When discretionary income shrank, so did demand. And, while the company may have survived as a small single shop, the expense involved with a lagging franchise business, coupled with lagging sales, did it in.
A Lesson: Expanding as the result of success can be a good idea, but taking on more expense without properly considering your ability to cover costs in the face of an economic downturn or a sales slowdown can be a fatal mistake.
This start-up app company focused on providing business travelers an application that would enable them to share savings from choosing less expensive travel options with their employers. When it turned out that employers weren’t interested in paying employees to look out for the company’s bottom line (they thought that should be uncompensated behavior), Travel Carrots pivoted to a model that simply provided low-cost recommendations to business travelers. That idea turned out to be a loser too, as people thought the extra layer of using a software program would be at best unnecessary and at worst add to costs rather than reduce them. In this case, the founders invested only $2000 in capital and three months of time to determine that the idea wouldn’t fly, and shut the company. The founders called this a win—as they were able to successfully prove the business idea a failure without a significant time and money loss.
A Lesson: Your business is never going to succeed if you’re selling something people don’t want. The sooner you can figure this out, the less likely you are to invest big and lose big.
This start-up focused on developing web-based tools for Ruby developers that was designed to help them understand and improve their code. The company began in 2008 and shut down in 2010. Among the factors leading to their downfall was that they developed tools without sufficient understanding of customer needs, and without sufficient input from their target audience. In this post about the failure, the founders highlight this, along with several other factors that lead to the company’s demise, including the hassles of administration for a geo-diverse workforce and a lack of effective marketing. Interestingly, the post notes that both founders had strong technical backgrounds but no business experience, and that this deficit may have played a significant role in the ultimate failure of the company.
A Lesson: A successful business needs both experts in the core product/service and in business itself, if one or the other is lacking, the chances of failure increase dramatically.
This online marketplace targeted college communities and connected buyers and sellers of clothing so that they could meet-up and complete the sale. The company started in 2013 and was able to attract a reasonably large user base at first, it scored an initial round of investor funding, but it had problems with retention and problems with monetizing the application. The company closed about a year later, having run out of money, and having not solved the core retention problem. One of the founders, in reflecting on the failure, notes that it might have turned out differently had they initially focused on implementing a payments system, instead of simply focusing on attracting users.
A Lesson: A business that does not have a mechanism for making money is not likely to succeed, regardless of how large a user base it has.
This start-up providing a price tracking and smart shopping tool for web and mobile started in 2012, raised $2.8 million in capital, grew a 300,000+ user base, and claims to have saved shoppers over $40M. It shut down for good on May 21, 2015. Why? The company hasn’t released a specific reason, but experts posit that price monitoring as a standalone service does not seem to be something consumers want, as evidenced by other recent business failures offering similar services. Another possible reason is that one-stop-shopping sites such as Amazon often offer good discounts without forcing customers to search for coupon codes or unearth special offer links.
A Lesson: If you see your competitors dropping like flies, and you can’t easily point to the differentiation point that will make your business succeed, it is time to pivot or cut your losses and exit.
For more lessons in learning from small business failures, read 101 Startup Failure Post-Mortems.
Succeeding after Failure
All those failure stories would be depressing, if there weren’t so many success after failure stories out there to motivate failed entrepreneurs to try again. For inspiration, read Richard Branson on Embracing Failure. Also check out The FAILURE Story series on the Stunnly blog for interviews with entrepreneurs who failed one or more times before finally achieving success. The interviews dive in depth into the specific mistakes made, the lessons learned from them, and how those lessons were utilized in the new business venture.
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