Start-up businesses and why they can fail

Richard Branson, Bill Gates, Judy Faulkner, Mark Zuckerberg, Cher Wang. What do they all have in common? They have all been hugely successful in business. If I was a betting man I would say that most, if not all of us who know these people, would have thought, ‘I want a taste of that!’

Let’s be honest, these are the guys that if we were all playing the same computer game have not only completed it whilst the rest of us all struggle on level two, they are the ones that have completed every level on every difficulty, made it look easy and are looking at the bugs in the game and how to overcome them.

Whilst working our 9-5 jobs most of us may sit there and think, ‘I can do that, I have what it takes, I can make this happen’. The reality is that most of us won’t. That’s not to say that we can’t, anyone could, but the security that comes from working for another company, be it small or corporate has its appeal and the fear of taking the leap and the responsibility of starting up your own business, tends to keep it as a dream rather than a reality.

Anyone can set up a company and anyone can become an entrepreneur. The first step is that initial idea. This can be totally maverick; one of those ideas that no one else has thought of. However, most of the ideas we come up with tend to fall into the second category of a pre-existing idea, just improved. Facebook for example.

So, why am I harping on about entrepreneurs and those with a very successful career in business? A few years back I saw a post on LinkedIn - a picture of an ice berg. It showed just the tip above the water, while as we know, the vast majority remained below sea level. This was a good analogy of what we, as people, see when looking at someone successful. We see the success, the money, the lifestyle, however, what we don’t see is the planning, the hours of work, the failures, the arguments, and the blood, sweat and tears that have gone into getting them to where they are today.

On paper and in principle running your own business looks relatively straight forward. I won’t lie - when I started, in all my naivety, I thought this was the case. My basic thought process was having a few clients > do the work > get paid > repeat.

To start with, how do we get that all important first client? Today many companies tie their employees into NDA’s, preventing them from taking existing clients with them when they leave, making it difficult but not impossible. Circumstances, hard work and occasionally even a bit of luck can help you pull in that first client.

For the purposes of this article, the chosen field you have decided to set up in is recruitment. You have your first client and they have given you a couple of temporary and permanent placements to fill. This part of the process is meat and drink to you. If you are the 360 recruiter that exists in today’s world then the process of taking a request, sourcing that candidate, vetting, sending to interview and, if successful, offering them the job on behalf of the client, is all in a day’s work. However, this is just one aspect. Working for another company means you have the time to focus almost exclusively on this part of the job, but you are not working for another company, you are working for yourself. Your company has other elements which require your attention: competitors, wage rolls, insurances, funding, bills etc. With all these spinning plates to manage, it got me thinking; why do so many new companies fail in the first 18 months?

Cash flow

A couple of years ago a few guys rented the office space below us and set up a recruitment company. Day 1 they turned up suited and booted and looking the part. They arrived in their brand new £40-60k cars. The office was full of employees, and when you walked out you could hear them all chatting away on the phones, with whom I can only assume were prospective clients and candidates. Three months later the office was empty. The young directors of the company were nowhere to be seen and neither were their staff. Here today and gone tomorrow.

Now, the fact that they were young and turned up in new expensive cars is not why they failed. Plenty of young individuals have been successful, and who’s to say they did not buy that car off the back of a previous prosperous venture. The problems came from focusing on the wrong things; when you start your own Company you need working capital, be this from personal funds or in the shape of a bank loan. You need to expect that the first two years of trading will result in you breaking even…if you’re lucky. That means that all of your spare available cash needs to go back into the business to keep it afloat. A £60k car on finance, whilst it looks good for the image, doesn’t add value to the company but takes from it. The cost of paying that car off over a year in real terms is the electricity and phone bills paid for a year.

Spending money in the wrong areas during these critical early days can cost a business dearly. Lack of funds is one of the main reasons new businesses fail. Running a successful venture can only happen if you have funds and if those funds are used properly, allowing you to have an effective cash flow. My MD always says, “cash flow is King,” and he is right. Those first few years, when sales might be low, running an effective cash flow is the only way your business will survive. You need the essentials that add value to the business. Whilst image is important it is not everything.

Focus and quality clients

When we first started our company, the excitement of having free reign to go out and do what we wanted took hold. We got distracted with resourcing for this and approaching clients for that. It meant that we focused less on what was making us money and more on what wasn’t. Now this isn’t always a bad thing. Going out and chasing down new leads and diversifying into new markets is always good, however make sure it doesn’t distract you from your core business. We spent a year of our time and money on an area we knew little about - it yielded poor results and lost us money. We were very close to breaking into this market a few times, however, if we had invested this money into the industries we already worked in, this money could have paid for an additional salary, that in turn may have produced better results.

Poor planning

This brings me to, ‘poor planning’. “Failure to plan is a plan for failure”. This is very true. We were so busy chasing other leads that we forgot to focus on what was allowing us to do what we do, and in a Market that is saturated with competition, taking your eye off the ball for even one minute can cost you clients. In order to ride those tough waves for the first 2-3 years you need to plan and have focus. You need to set weekly, monthly, quarterly and yearly targets. By planning and creating goals you focus yourself and your team. It saves you money and time, which are both luxury items in those early days.

Clear company values

When you watch a professional game of rugby or football, you watch people that are masters of their sport. They have spent years perfecting their skills set to become the best at what they do. The same can be said in business. Certainly, for us in recruitment, being the best at what you do is one of the main reasons clients will use us. Building relationships based on a quality service not only attracts new clients but helps retain them too. Jumping across the pond for a moment, Harvard Business School reported that increasing customer retention rates could increase profits by 25%-95%.

We worked out that to become the best at what we do we needed clear company values - values that were simple but intrinsic to our business. It allowed us to set some company expectations and gave us a platform to calibrate our staff so we were all singing off the same hymn sheet, or so to speak.

Spreading your risk with more clients

Many small companies start because they have one or two big clients that will do business with them. They become comfortable with the turnover and don’t push for other clients. This is a risk, as if one of those clients pulls out suddenly you are left without any business. Whilst chasing every new lead isn’t the most effective use of time and resources, it is still important to gain new “quality” clients, as this will spread the risk should one client decide to change supplier.

Social media and marketing

I start my day in the same way every morning. I wake up and I grab my phone to check Facebook or Twitter. Social media today plays a huge part in our everyday lives - from Facebook and Twitter to LinkedIn and Snapchat. Marketing is everywhere and every platform is a chance to sell your product. Choosing the right marketing tools is key to any successful business. Initially, our website and LinkedIn page were the two main marketing platforms we wanted to focus on. Making decisions on what and where to market, will save you both time and money.

Analysing performance data

Can you name me one perfect company? Just the first one that springs to mind. If you’re having difficulty, you’re not alone. This is because the perfect company doesn’t exist. It doesn’t matter how big or small you are, every business makes great decisions and bad ones, has successful projects and unsuccessful projects. So, it’s important that you analyse your performance data. You are never too big or small to look at where your company is doing well and where it isn’t; by doing this you will highlight both positives and negatives and, therefore, be able to react and deal with what is happening within your company.

Technology and data security

What about technology? In a world of ever evolving technology we are relying more and more on our digital systems to reduce work load and store data. When we first started out, all our files, clients and contacts were stored on one computer in the office. Scenario 1: What if we had a fire in the office which destroyed everything? Our whole business would now be gone. Scenario 2: Someone hacks our servers and gains access to our computer, potentially costing us thousands in ransom ware. I attended a recent Barclays seminar where they quoted a figure of £21.2 billion worth of fraud being committed in the UK every year. How much of that hit small businesses? In order to combat these risks, using data security solutions and backing up your data regularly allows you to safeguard yourself against these types of threats. We have the latest anti-virus software, and back-ups are now kept securely on the cloud as well as a hard copy of the hard drives off site.

In conclusion

Fact: starting your own business is a daunting task. With just a 50% chance of success in those first two years, is it worth it? By implementing a clear plan, keeping a strict eye on funds, setting simple company values, keeping your focus, building your client base, marketing your business correctly, analysing your data and protecting and backing up your company files, you can greatly increase this statistic. If setting up a company was easy everyone would do it. I don’t have all the answers and our business, being in its infancy, still has a long way to go; however, when looking at that iceberg we began in the right place…underwater with the planning, the hard graft, the early missteps and learning curves, and the discipline to remain focused and determined.

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Oct 6, 2017 By James Hanson