Most start-ups fail within two years: How to minimize the risk of failure when founding a business

Few things are more fulfilling than founding a successful business. If you want to be an entrepreneur go for it! 

But keep this in mind, as an entrepreneur you are heading off into uncharted waters with no map, operating instructions, or a guide to lead the way. As a result, the US Small Business Administration reports that fewer than 10% of new businesses succeed. Furthermore, business failures are expensive. Life savings can be squandered, along with months or years of time, effort, and passion.

I know this from bitter experience. After three successful business start-ups, I founded a fourth without conducting a marketing test. It failed. My investment of $200,000 was lost, along with an equal amount from investors. 

It is my contention that business failures can be minimized when the founders follow these 10 steps.

1. Prepare a one page description of your company: This forces you to think through, and clearly describe, the underlying business rationale. You will need this document in many situations: when raising capital, meeting with banks, recruiting, and getting feedback from prospective customers or clients.
2. Prepare a profile describing prospective customers: Will your business be selling directly to consumers (B to C) or businesses (B to B). If it is B to B, are you selling to junior purchasing agents or senior executives?  If it is B to C, who exactly are you selling to? For example: golfers, teenagers who play online games, women interested in fashion and beauty.
3. Check out the competition: Prepare a list of competitors in your market and compare them in terms of price and specific features. If possible, gather intelligence on your competitor’s sales. Set up a spreadsheet comparing your product or service to each competitor.
4. Estimate the scope of the market: Will you be selling locally, regionally, nationally, or internationally? Determine the number of prospective clients in your target market. Estimate the percentage of prospective clients you must capture to be successful. What market share can you expect to capture from competitors?
5. Conduct a marketing test: Over 40% of business failures result from over-estimating the market. To minimize this risk, conduct a marketing test to confirm the demand for your product or service. You can be creative in doing this research. For instance, to determine the market for a personal investing self-study program I planned to publish, a professor at the University of Toronto agreed to read its description to his class of 200. When over 30% expressed interest by raising their hands, I knew we had a winner. Over 5,000,000 enrolled in this program over the next decade.
6. Research sources for components to be outsourced: Are you planning to develop new products or services, resell from third-parties, or build something incorporating parts from suppliers? If you are outsourcing, be sure you can negotiate a contract ensuring price stability, supply, and quality control.
7. Prepare sales, marketing, and financial plans: Typically, 5% to 25%, even up to 50%, of revenue is spent on sales and marketing. When founding a business, be sure your marketing and sales strategy suits the sector. If you do not have a marketing background, consult with someone who does, and prepare a plan detailing the steps required to take your business to the point when it is generating a positive cash flow and is a viable business.
8. Source software and operating systems: Common types of software include word processing programs, accounts software, billing software, database software, payroll software, asset management software, desktop publishing programs, and client and sales management. Before making decisions on software, be sure to get expert advice. Never develop custom software until you are certain the business is viable.
9. Raise capital: Every start-up needs capital. Be sure the amount raised is sufficient for planned business expenses, the founders’ living costs, and a buffer to cover unexpected contingencies. Common sources of capital are: personal savings, personally secured bank loans, credit cards, mortgaging real estate, selling shares to friends and family, angel investors, venture capital companies, and strategic investors. To raise capital from any third party, you will need to develop a report describing the business, accompanied by financial projections.
10. Establish a set of business principles: Business founders must make thousands of decisions. To guide you in making the right ones, it is useful to establish a set of principles you have thought through in advance. Factors to consider include: When you need outside help, will you seek top-tier expertise or go with a less costly option? Will you be generous in paying salaries and benefits, or keep costs as low as possible? Will your company be marketed as a “quality” brand, or a “low cost” supplier? Do you want to build a successful small business operating close to home or serve a broader market and become a regional, national, or international leader in your sector?

This guidance is based on my 50 year career as a publisher and entrepreneur, I now coach entrepreneurs and spend my time writing on business topics.