The 10 biggest mistakes entrepreneurs make
and how to avoid them
Persistence is the mother of good luck
Fall down six times and get up five and you have failed because you quit. Fall
down 10 times and get up 10 and you are a success.
So says Tim Sole in his book Make Success Your Friend ? One hundred and
one practical tips for what succeeds.
Sole, who is a previous CEO of the Public Trust, says in a section of the book
on persistence, that people who succeed have often failed more than many of
the people who don't succeed.
"Check the arithmetic of the example yourself. Frequently the only difference
between success and failure is persistence."
In his book Sole says it is normal to have setbacks as progress often has a
pattern of two steps forward one step back. When things go consistently
wrong the thing to do is to be flexible in your methods, not your goals.
"Persistence pays because life's gems are often uncovered in unexpected
places at unexpected times."
He says the measure of success is as much about the obstacles you
overcome as the outcome you achieve.
"Laziness is the habit of resting before you become tired and success is often
found between tiredness and exhaustion. If you give up a goal knowing that
there is something you could have tried but did not, then you gave up too
soon.
"Be persistent because persistence is the mother of good luck. Armed with
self-discipline and determination, your goals are three quarters achieved. In
the game of life the score at half time does not matter."
Mistake Number 1 - Undercapitalisation
Almost all of our advisers listed a shortage of finance as a major stumbling
block to progress in business. Often the start-up risk factor causes would-be
financiers to shy away.
Neil Richardson, who chairs the Foundation for Research Science and
Technology and also chairs a number of businesses including Visique
Optometrists and Endace Measurement Systems, has seen it happen.
"Being undercapitalised is not only about lack of equity, but also the lack of
appropriate debt facilities from a bank that understands the new business and
its risk-reward profile," he says.
"This is a significant problem in New Zealand where there is both a lack of
risk-taking new venture equity, and very few banks willing to lend against
businesses. Rather, they require personal guarantees and real security that is
typically not available in start-ups."
One cure for early cash-flow woes is to dig your well before you need it.
Arrange that "opportunity" or "mistake" finance well in advance, so you don't
have to rely on banks at the last minute.
Denis Orme, who is the CEO of Bartercard and author of Lessons from
Leadership Failures - The Greenfields Approach, believes it's about planning
beyond the initial start-up.
"Many start-ups exceed their initial projections and then [the] principals
scramble to pull the resources together to get the business to the next level."
These resources don't just include cash flow, but also people, supply chain
management, plant and equipment. Orme advises entrepreneurs to have a
monthly cash?flow plan forecasting out over the initial 18 months, to facilitate
"mid?course corrections".
Mistake Number 2 - Lack of business expertise
This problem manifests itself in many ways, particularly when the
entrepreneur or inventor has a great commercial concept, but doesn't think
like a businessperson.
According to business author Ian Brooks these people fail to see things
through customers' eyes. "Rather than creating value for customers and
asking what a product or service can do for them, they are more focused on
making the product or on selling," he says.
"This leads to the less than satisfactory outcome of looking at their business
from the inside out. Their business approach becomes all about self
protection and making life easier for them."
Author of 12 business books including Putting the Customer First, Brooks
advises new business owners to focus on creating more value for customers,
rather than being tempted to go down the discounting path.
"Create more value, then sell that value constantly," he says. "People make
the mistake of being hunters not farmers ? in other words, they focus on
finding new customers, rather than looking after their existing customers first."
All this comes back to a lack of basic business skills and knowledge.
Mistake Number 3 - Poor research and planning
Insufficient market research can lead to big disappointments down the track this according to Kate Wilson, a registered patent attorney with Hamilton law
firm James & Wells.
Wilson is keen to see businesses grow through intellectual property protection
and strategy, and works with many entrepreneurs to help commercialise
innovation.
"First they must ask, is there a demand for my product? They need to check
competitors' products, and search the market for competitors that could
eventually become collaborators," she says.
"Do your intellectual property research - what other patents and trade marks
are out there? And what is it about your product that gives it the edge?"
Planning is not just a nice thing to do; it's absolutely essential as is the
thorough testing of products and business models before going to the market.
Even though the proverbial windows of opportunity are constantly getting
shorter, research and planning is not an area to scrimp on. How up-to-date is
your business plan?
Mistake Number 4 - Hiring the wrong people
Bill Gallagher, of Gallagher Group, speaks from considerable experience
when he says "be very careful who you hire, the cost of employing a lemon is
enormous".
'Keeping a business afloat is all about putting square pegs in square holes,
and round pegs in round holes ? shuffle people around too much and the ship
sinks," he says.
It's all about matching people with the right job, and staff promotion can be a
particularly tricky area. It's easy to promote people past their level of
competence. Just because someone's good technically, doesn't mean they'll
make a good business manager," Gallagher says. "Go down that path and
you'll not only lose a good tradesman, you'll also gain a lousy foreman."
Gallagher says working with a competent recruitment specialist doesn't make
you immune from poor performers either - "ultimately it's your responsibility. If
you're hiring someone from overseas, get several reference checks and talk
to referees who aren't personal friends of the applicant."
A good rule of thumb is to hire the very best person you can afford at any
given time.
Mistake Number 5 - Insufficient marketing
For every dollar spent in developing a product, five times that amount should
be spent on marketing it.
Unfortunately a large number of entrepreneurs fail to grasp the importance of
marketing - they assume the product (or service) will sell itself, and customers
will just come.
"This is surprising when you ask entrepreneurs what they should be
concentrating on most in their business," says Gaelle Deighton, CEO of
Enterprising Manukau, and the Economic Development Agency of Manukau
City.
"They usually say marketing, and this is evidenced by the high numbers of
attendees at marketing seminars and workshops."
Steve Corbett, who heads up Massey University's business incubator, the ecentre, says taking products to market costs, and financial projections should
always allow for marketing expenses. "And while the market size is important,
it is customers that you need - they pay the bills."
Orme believes it is crucial to implement a month-by-month marketing plan.
"Seduced by the first few quick sales there can be a gap before a sufficient
flow of prospects is built up in the sales funnel," he says.
Implementing a month-by-month marketing plan that involves client
relationship management, visibility-related activities, and targeting of new
prospects and potential referral sources will ensure you have a steady stream
of profitable new business."
Mistake Number 6 - Inadequate systems and processes
While you may initially get away with inadequate systems, further down the
road it can wreak havoc.
There are entrepreneurs out there who want to move too fast," says Michael
Whittaker, a former Entrepreneur of the Year and CEO of The Atlantis Group,
a worldwide database technology company.
"Many of them miss the opportunity to consolidate gains and, because they've
got their head down, take their inefficiencies on to the next stage of growth.
They must invest in sustainable systems, not superficial ones," he says.
Investors will also want to see good systems in place, and Whittaker says
investor relations are paramount. "When things get sticky, or a timeline gets
extended, they'll want assurance that everything's under control."
Communication of information to stakeholders, staff and customers is
essential, and this includes the planning, the message, and responsiveness to
customers.
Mistake Number 7 - Setting unrealistic sales budgets
Denis Drumm, a senior partner with accountancy firm Staples Rodway,
reminds the "dreamers" that no matter how good their product may be, a huge
effort in time, expertise and capital is required to get market acceptance and
people walking through the door.
"Many find that their personal overheads are too hard to control and take
excessive drawings before the business returns a profit," he says. "There are
many businesses out there that looked like they were making money until the
day they went broke. The books were showing a profit, but there just wasn't
enough money in the bank to pay the wages."
Drumm says entrepreneurs should know their breakeven sales point. "Monitor
both sales and gross profit figures monthly. Know your overheads, your
margins - in short, know what you're doing."
Orme reminds over-enthusiastic entrepreneurs that it usually takes six or
seven contacts with prospective customers before they will like you, trust you,
and finally test your products or services. It takes even more time to convert
them into ongoing business and in due course collect the accounts
receivable."
His advice is to hone revenue assumptions and have a "worst case" profit
plan - what if you only achieve 85 percent of the revenue target?
"At the other end of the spectrum, imagine a doubling strategy. If you did 200
percent of your projection, what resources would you need, and in what
priority?"
Mistake Number 8 - Partnering with friends, family or the wrong people
Steve Corbett strongly advises people not to go into business with close
friends or family. If you do, then make sure you have written agreements on
how the company will be managed, how profits and losses will be distributed,
and how each of you will exit the company if required and do it before you
need to do it."
Partnerships can be fraught with disaster, particularly when integrity is
lacking. It's vital that you align with somebody who shares the same vision
and drive as you - somebody who is also willing to invest in the technology
and systems to stay one step ahead of the competition.
Drumm advises business partners to keep the relationship strictly business,
totally removed from any social life, and to foster mutual respect.
Mistake Number 9 - Poorly defined international strategy
Getting into offshore markets where they lack expertise is another area where
entrepreneurs can come unstuck.
Bill Gallagher's company now has 15 associate offshore businesses in which
it is generally a minority partner to a local entrepreneur. The arrangement
works well, better than the fully-owned "missionary approach" as Gallagher
puts it - however, the local entrepreneur's integrity must be impeccable.
Companies with sights set on overseas markets must have an international
strategy in place and seek advice from experts - both locally and in the
markets they're targeting. As mentioned earlier, windows of opportunity are
getting smaller, so it's important to be geared up to move quickly when
opportunities present themselves.
Mistake Number 10 - Lack of support structure
The failure to build a genuinely independent minded, skilled and available
support structure is a mistake made by many entrepreneurs.
"This support can take several forms," says Neil Richardson, "Including
individual mentors, an informal advisory board, or a formal corporate board."
He says that without support the outcome is somebody who focuses only on
their dream, while ignoring "black clouds" on the horizon. "The entrepreneur
also gets swamped with problems that compound into an 'alligator swamp'
eroding confidence, motivation and composure."
Through personal experience with new ventures, Richardson has learnt a
number of lessons, and advises startups to immediately establish a strong
governance regime to facilitate the decision making process. "This includes
appointing directors with appropriate skills, experience, relationships,
independence from shareholders, mentoring skills and time available to
commit to the business," he says. "Also the organisation of appropriately
structured and chaired board meetings."
Understand potential exit strategies, the need for future liquidity events and
how that can be achieved.
"A good rule is to never go into a new venture without having a clear view of
how the exit can be achieved," adds Richardson.
Whatever you do... don't think like this
Dr Marie Wilson who is the research director at Auckland business
accelerator The Icehouse, and a professor at the University of
Auckland Business School, says some of the common entrepreneurial
mistakes she sees include preconceptions such as:
You just need a great idea or technology. There is no such thing as a
"million-dollar idea". Everyone has great ideas, the trick is to tap into a
market need and create a winning product. Many ventures hire their
technical talent; the leader has a vision of the market that leads to
success.
You understand the market because you have talked to a few friends.
Thorough market research is required to know who will buy, and why,
to determine what characteristics will cause your product or service to
appeal. If you can't answer, "what problem does this solve", then you
don't have a viable business idea.
You have no competitors. All businesses have competitors, because
anyone can choose to spend their money on something else, even if it
isn't just like what you are doing or developing.
You've got all the time in the world and you can start small and
gradually tackle bigger and bigger markets. If it's a good product, it can
be knocked off faster than you can blink, and unless the idea is
protected and you tackle markets quickly, you won't have a second
chance. You may have to partner, or look at other ways of getting
product to market, but the race is to the swift.
You can do it all yourself. Successful ventures are launched, and
usually funded, on the basis of committed, talented entrepreneurs and
the talent (technical and otherwise) that they can bring to the
endeavour. Few people have the required skills and abilities to do it all
themselves