starting a business Basics
Welcome to Early Stage Legal. We are excited to begin your entrepreneurial journey with you and stand ready to help you succeed. As you probably know, starting a business is challenging and will require all of the perserverance, diligence, hard-work, knowledge, and insight that you can muster. The United States Small Business Association has shown that 54% of new businesses fail to survive beyond 4 years. Most of these businesses fail within the first 2 years.
our goal: Your success
We have built Early Stage Legal from the ground up to help entrepreneurs create successful businesses. To do so, we analyzed research on the causes of new business success and failure. We summarized the research and added our own experiences as entrepreneurs, venture capitalists, and consultants to create the master list below. We have also provided you with links to resources on our site designed to help you succeed in forming your company, raising money for your company, and managing and growing your company. We hope that this will be helfpul to you.
Top 8 Reasons new businesses Fail and What To Do About It
We define business failure as ceasing operations. The proximate cause for nearly all business failures is inability to achieve cash flow positive results or raise money to fund losses. This is obvious and does not help entrepreneurs understand how to avoid business failure. So we tried to gather more of the root causes for failure. According to our analysis, these are the Top 8 "Root Cause" Reasons why businesses fail and our recommendations for addressing these problems:
#1. Poor market research and inadequate learning during the initial startup phase. Most companies do not perform adequate market research before starting their business. What you are looking to prove is that you can create a business with sustainable, high-margin revenue. This involves proving three things:
- First, you must find customers that are willing to pay for your product or service
- Second, you must prove that there are enough customers who will do this once or that some customers will do it repeatedly enough to create a recurring source of revenue.
- Finally, you have to prove that you can ultimately make a profit off of the revenue.
Most entrepreneurs assume that they have a product, a location, an idea, or a team that is strong enough to succeed despite the general challenges they know most entrepreneurs face. Starting a business can and should be much more scientific. Apply the Scientific Method to your busines problem. Test the hypotheses above and prove them accurate before you spend significant amounts of money. Consider the following as ways to help you test:
- Survey a statistically significant number of relevant potential customers about the need for your business idea and the value it might offer
- Quantify the market size to make sure it is large enough to support recurring revenue
- Offer a scaled down version of your product or service for a limited time to see if there are willing buyers
- If your product involves automation, offer an un-automated version of your product (even if it is at a different price point) to see if the service creates value
- Conduct experiments where potential customers actually pay for a service--this is the ultimate test of willingness to buy
- Test and refine different business models to see how much you can drive to the bottom line
- Experiment with different customer acquisition strategies to make sure that the cost of acquiring a customer is less than the customer's potential revenue
Early Stage Legal's Solutions: Use the tools and techniques provided in Early Stage Legal's Assessing Your Business Idea. Continue to learn throughout the startup phase. Even when you have found a market need, make sure you understand whether or not you can serve the need in a cost-effective way and whether or not the need will create a repeatable, sustainable business.
#2. No viable market. This is related to the point above. It is suprising how many entrepreneurs spend tens of thousands, hundreds of thousands, or even millions of dollars before realizing that there is no viable market for their product or service. Sometimes the market is too small, sometimes the market would be large but substitute products make it so that customers are unwilling to pay for your product. In any case, you can solve these problems in advance by doing thorough market research in advance of launching your business. There are specific methods for estimating the size of the total market and the size of the addressable market.
Early Stage Legal's Solutions: Use the market sizing tools and techniques provided in Early Stage Legal's Assessing Your Business Idea.
#3. Lack of capital and inability to raise capital. If you can build a great business without raising capital that is probably the best path. However, some of the best businesses require capital, even significant amounts of capital to fund loss-making periods before achieving profitability. Finding ways to raise this capital is a perpetual problem for entrepreneurs. Early Stage Legal was founded by venture capitalists--so helping entrepreneurs successfully find and raise capital is central to our company mission. We have a simple mantra at Early Stage Legal, succesfully raising capital depends on 4 things:
- Knowing your business
- Knowing your investor(s)
- Being willing to sacrifice upside and control
- Producing great results with limited resources
Early Stage Legal's Solutions: Knowing your business means knowing how to scale your business, knowing how profitable it can become, and knowing how to structure your business for long-term success. You can learn more about our mantra and what it means by visting the Raising Money for Your Company page. When it is time to raise money, make sure you protect you and your company properly. You can use Early Stage Legal's debt or equity financing document services.
#4. Too much debt. Some entrepreneurs are able to raise debt financing but are not able to sustain the cash flow necessary to servicing the debt. Debt adds significant risk to your business. For these reasons, even though selling equity in your company is much more expensive econmically than debt, there are good reasons why many entrepreneurs want an equity funding partner. Also, we are generally of the mindset that the more you can possibly bootstrap your company (meaning growing your company without raising money at all), the better. Bad reasons for raising equity capital or borrowing money include: most pre-revenue activities like validating or assessing your business opportunity, financing buildings, equipment, or product development. Good reasons for raising equity include many activities after you have already validated your business opportunity including hiring key people to grow the business, beating a competitor, growing or scaling a successful business, etc.
Early Stage Legal's Solcutions. Please consult our Raising Money for Your Company pages to familiarize yourself with the money-raising process. When it is time to raise debt financing, let Early Stage Legal help you. Visit our debt financing document services page.
#5. Inability to create or maintain the right team. Putting together the right team is a difficult challenge on its own. Retaining and maintaining a high-perfoming team may be an even larger challenge. Many new companies fail because of founder disputes. One founder disagrees fundamentally with another or the founders realize that they no longer want to work for each other or the company. These challenges can easily destroy a budding company even when one or more founders remains committed to moving the company forward. Often when there is a fundamental dispute one or more members of the team leave. Finding a replacement is a difficult challenge and is made more difficult because many companies do not vest their founders. This means that the founder that leaves still owns as much of the company as the founders who remain. This can actually create a perverse economic incentive for key founders to leave because they can return to more stable, lower risk jobs while still benefitting from the hard work and upside created by the ongoing perserverance and work of the original founders.
Business research has shown that providing equity to key employees in a business will increase employee retention, improve employee attitudes, increase chances of firm survival, and will likely improve performance of the company. Given how difficult it is to succeed in a new business, we recommend that you consider granting equity to your employees. Early Stage Legal can help you create equity packages for a C-Corporation, S-Corporation or LLC.
Early Stage Legal's Solutions. Visit our Team Building pages. When it is time to start your company, work with Early Stage Legal to form your company. Unlike any of our competitors, our formation packages include all of the protections you will need to create the right incentives for founders including vesting and equity incentive packages.
#6. Lack of execution. There are obvious benefits to starting your own company. You will be your own boss. You and a select group of people will have significant control over the future of the business. Your work will have direct impact every day. Despite these benefits, starting a business is hard work. If you want 8- or even 10-hour days, stick with a corporate job. Many people find that the romance of starting your own business fades as you find the amount of work required to succeed.
Early Stage Legal's Solutions. Learn more about execution in our Managing and Growing Your Business section.
#8. Competition. Competition is a continual concern. As Andy Grove, the founder of Intel said, "only the paranoid survive." Surviving and thriving will entail knowing your competition and beating them.
Early Stage Legal's Solutions. As you deliver a great product or service at a reasonable price point and stay abreast of any competitive response, you will cultivate repeat customers. Repeat customers will become the lifeblood of your business. Learn more about beating your competition in our Managing and Growing Your Business section.
Top Reasons Businesses Succeed
Not only should you avoid the reasons that businesses fail but you should try to do the following:
- Ensure access to capital--either self-fund or line up funding from another source
- Identify a great market
- Build a superior product or service
- Hire and retain a great team
- Identify and use the right business model--price point, pricing strategy, service or product delivery model, etc.