Have you heard that 50% of small businesses fail in the first year and 95% fail in the first five years? Let me tell you why.
Most small businesses fail becuase they can’t handle debt, get buried by rent, or get pushed into risky decisions by impatient investors.
I’ve seen a lot of business fail taking the “Big Bang” approach to small business start up. They put together a fancy business plan and they execute it perfectly. They take out a bunch of SBA loans, have trendy digs, hire talented people with a proven record, maybe even build a building or two. Sometimes this approach works, with dramatic success, but more often than not, it fails.
The problems are:
- They never tested the market, so when the sales don’t materialize immediately, they are under capitalized, and go bankrupt in a few years.
- They spent too much on fluff. In the quest to look professional or hip, they overspend.
- Instead of adding employees once demand is established, they add them before the first dollar is earned, banking on potential sales to pay the wages, and burn through too much capital too quickly.
Making mistakes is the secret to learning. You learn what you need to know about business through your pain and failures. Organic bootstrapping allows you to learn as you go without going broke, the “big bang” approach does not.
Christine and I are pushing hard this summer to grow Christine’s Books. We’re moving her store out of our house.
It needs to move because:
It’s taking over the kids play areas
And is creeping into every other area of the house
To expand, we need employees, and our house wouldn’t be a good place for others to work.
In 2003 when she first started selling books on the internet, she invested $500.00 in inventory, and kept it on a 6 ft table. By 2004 we had run out of space in our house, and bought a new house that was triple the size. That gave us five more years. Now we plan to lease a showroom and warehouse space that is as big as our entire house. We are hoping that will last 3-5 years and allow us to quadruple sales and add several jobs to the local economy.
While looking for the right location, I’ve had the chance to meet a few entrepreneurs who have grown the same way we have, by organic bootstrapping. Roger at Business Systems International sells refurbished phones. He started in his garage and now owns multiple commercial properties, and has branched out into the software business. Opportunity begets opportunity and success begets success. Roger said, “Every time I moved to a larger location my revenues doubled.”
I talked with Brian at Sunlite Windows and Doors and he had a similar story. He started in his garage, then built a bigger garage with the profits, then leased a shop and warehouse. He said, “When we rented our first shop, I said, we’ll never use all this space. Three years later it was time to move. Now I have triple the space and we own 50% of the window market in this area.”
If you are interested in how small businesses start and grow organically, you’ll be interested in the coming series of posts.
Next post: we’ll talk about finding the right location at the right price.