Avoiding Mistakes that Lead to Failure

Stephen DeAngelis

September 16, 2010

Stefan Stern begins a review of the book How They Blew It with these words: “All the management gurus are agreed: you learn more from your failures than from your successes. So the idea of writing a book on business failures must be a good one [“Tale of business failures that loses sight of bigger picture,” Financial Times, 8 July 2010]. The book is about CEOs and entrepreneurs behind some of the world’s most catastrophic failures and was written by Jamie Oliver and Tony Goodwin. Stern continues:

“Jamie Oliver, a journalist, and Tony Goodwin, an entrepreneur, have selected 16 recent stories of failure, and given us a summary on each. For potted versions of the ups and downs suffered by, for example, Russian oligarch Mikhail Khodorkovsky, Richard Fuld of Lehman Brothers, WorldCom’s Bernie Ebbers, Kenneth Lay of Enron and Adolf Merckle at HeidelbergCement, this is the place to come.”

Despite the fact that there are lessons to be learned from failure, Stern isn’t sure that readers of How They Blew It “will gain particularly useful insights into any of these characters.” Stern believes the book was “written very quickly” — probably too quickly. “That is the only charitable explanation for the series of ugly and at times absurd sentences which crop up far too often.” Stern does admit, however, that “the book has its moments.” He explains:

“The interview with Mark Goldberg, the former chairman of Crystal Palace (an English football club), is revealing. It is perhaps the book’s only piece of original research. Mr Goldberg lost his entire fortune dabbling in the notoriously hazardous business of football. His comments reflect the true nature of the chastened entrepreneur. ‘I was too eager to do the deal,’ he says. ‘I wanted it too badly. In a way I deserved what I got because I let my heart rule my head. I would do a lot of things differently if I was in that position again but I don’t regret what I did. I did fulfil a lifetime ambition of owning the football club I supported as a boy. But I really did lose £40m of my own money, and I really did do it with the right intentions.’ Even now, this inveterate dealmaker cannot quite accept that losing £40m was a complete disaster; though he acknowledges passion alone is not enough to run a business.”

Unfortunately, Stern concludes that “the book’s other ‘insights’ are less impressive. … Many of the conclusions are sensible – do not believe the hype written about you, admit that luck may have played a part in your success, think of creating a legacy – but a final clanger undermines the reader’s confidence still further.” And what is that final “clanger”? The authors conclude that all of the CEOs had one thing in common — “something of a chip on the shoulder about who and what they are and where they came from.” Stern writes, “This, frankly, is nuts. The whole point about driven, obsessive entrepreneurs and (wannabe) business titans is that they cannot stop. Yes, this will lead to disaster for some. But suggesting that they take a breather or settle for where they are is bad advice that will not be taken by those to whom it is being offered. The authors had a pretty good idea for a book here. Unfortunately, they blew it.”

 

There are lots of people willing to give entrepreneurs advice. Recently, one of the most read Wall Street Journal articles, both in the U.S. and internationally, listed one individual’s top ten list of mistakes that entrepreneurs should avoid making [“10 Mistakes That Start-Up Entrepreneurs Make,” by Rosalind Resnick, 1 September 2010]. Resnick writes:

“When it comes to starting a successful business, there’s no surefire playbook that contains the winning game plan. On the other hand, there are about as many mistakes to be made as there are entrepreneurs to make them. … Here, in my experience, are the top 10 mistakes that entrepreneurs make when starting a company.”

The first mistake she says many entrepreneurs make is that they decide they can make it on their own. She continues:

1. Going it alone. It’s difficult to build a scalable business if you’re the only person involved. True, a solo public relations, web design or consulting firm may require little capital to start, and the price of hiring even one administrative assistant, sales representative or entry-level employee can eat up a big chunk of your profits. The solution: Make sure there’s enough margin in your pricing to enable you to bring in other people. Clients generally don’t mind outsourcing as long as they can still get face time with you, the skilled professional who’s managing the project.”

In his book The Art of Innovation, Tom Kelley wrote, “The myth of the lone genius can actually hamper [an organization’s] efforts in innovation and creativity. … Loners are so caught up in their idea that they are reluctant to let it go, much less allow it to be experimented with and improved upon.” He goes on to note that Thomas Edison, who is often pointed to as a lone genius, had a team of fourteen people that helped him conceive, build, and market his inventions. The second mistake identified by Resnick agrees with the old adage, “Too many cooks spoil the stew.” She explains:

2. Asking too many people for advice. It’s always good to get input from experts, especially experienced entrepreneurs who’ve built and sold successful companies in your industry. But getting too many people’s opinions can delay your decision so long that your company never gets out of the starting gate. The answer: Assemble a solid advisory board that you can tap on a regular basis but run the day-to-day yourself. Says Elyissia Wassung, chief executive of 2 Chicks With Chocolate Inc., a Matawan, N.J., chocolate company, ‘Pull in your [advisory] team for bi-weekly or, at the very least, monthly conference calls. You’ll wish you did it sooner!'”

Having a set of trusted advisors is important. As you get established, a good board of directors is also critical for your company. You need naysayers among those you listen to; but don’t surround yourself with so many voices that important advice gets lost in the noise. The third mistake, Resnick claims, is not getting products to market fast enough. She writes:

3. Spending too much time on product development, not enough on sales. While it’s hard to build a great company without a great product, entrepreneurs who spend too much time tinkering may lose customers to a competitor with a stronger sales organization. ‘I call [this misstep] the “Field of Dreams” of entrepreneurship. If you build it, they will buy it,’ says Sanjyot Dunung, CEO of Atma Global, Inc., a New York software publisher, who has made this mistake in her own business. ‘If you don’t keep one eye firmly focused on sales, you’ll likely run out of money and energy before you can successfully get your product to market.'”

It doesn’t take a genius to know that a business without customers cannot survive. One of the points made in Clayton Christensen’s book The Innovator’s Dilemma is that too often company’s don’t realize that disruptive technologies are going to bite them because emerging technologies don’t come with all the bells and whistles that established companies think their customers want. Customers eventually see these disruptive technologies as “good enough” for their purposes and jump ship to buy them because they are often less expensive than products with more features. As an entrepreneur, you want your product to be “good enough” to go to market. Add the bells and whistles later. Resnick continues with her list:

4. Targeting too small a market. It’s tempting to try to corner a niche, but your company’s growth will quickly hit a wall if the market you’re targeting is too tiny. Think about all the high school basketball stars who dream of playing in the NBA. Because there are only 30 teams and each team employs only a handful of players, the chances that your son will become the next Michael Jordan are pretty slim. The solution: Pick a bigger market that gives you the chance to grab a slice of the pie even if your company remains a smaller player.”

Why do you think that companies have salivated over doing business in China for so many years? The answer, of course, is the potential size of the market. They understand that selling to even a small percentage of billion people is still a lot of customers. If you have what you consider to be a niche product or service, you might bring in outside experts to help you figure out how to expand your potential market. Resnick continues:

5. Entering a market with no distribution partner. It’s easier to break into a market if there’s already a network of agents, brokers, manufacturers’ reps and other third-party resellers ready, willing and able to sell your product into existing distribution channels. Fashion, food, media and other major industries work this way; others are not so lucky. That’s why service businesses like public relations firms, yoga studios and pet-grooming companies often struggle to survive, alternating between feast and famine. The solution: Make a list of potential referral sources before you start your business and ask them if they’d be willing to send business your way.”

Seeking allies instead of creating enemies is generally a good idea when starting a new business. Obviously, some new products or services are going to put others out of business; but, that is probably the exception rather than the rule. Therefore, identifying who you might partner with is a good idea. If your product or service complements what an established company is already offering, all the better. Just remember, there must be a quid pro quo or the effort to find helpful partners will be stillborn. I will publish a separate post about partnering in the future. Resnick continues:

6. Overpaying for customers. Spending big on advertising may bring in lots of customers, but it’s a money-losing strategy if your company can’t turn those dollars into life-time customer value. A magazine or web site that spends $500 worth of advertising to acquire a customer who pays $20 a month and cancels his or her subscription at the end of the year is simply pouring money down the drain. The solution: Test, measure, then test again. Once you’ve done enough testing to figure out how to make more money selling products and services to your customers than you spend acquiring those customers in the first place, roll out a major marketing campaign.”

Trust me; there are a loads of marketing firms willing to take your scarce resources to provide you with advertising. But nobody can guarantee that they can get customers to walk through your door. I’ve found that the best way to get customers is old-fashioned legwork. That doesn’t mean you shouldn’t advertise. That decision depends a lot on the kind of business you are in. Resnick’s advice about understanding the landscape is on point. She next turns the subject of raising capital.

7. Raising too little capital. Many start-ups assume that all they need is enough money to rent space, buy equipment, stock inventory and drive customers through the door. What they often forget is that they also need capital to pay for salaries, utilities, insurance and other overhead expenses until their company starts turning a profit. Unless you’re running the kind of business where everybody’s working for sweat equity and deferring compensation, you’ll need to raise enough money to tide you over until your revenues can cover your expenses and generate positive cash flow. The solution: Calculate your start-up costs before you open your doors, not afterwards.

8. Raising too much capital. Believe it or not, raising too much money can be a problem, too. Over-funded companies tend to get big and bloated, hiring too many people too soon and wasting valuable resources on trade show booths, parties, image ads and other frills. When the money runs out and investors lose patience (which is what happened 10 years ago when the dot-com market melted down), start-ups that frittered away their cash will have to close their doors. No matter how much money you raise at the outset, remember to bank some for a rainy day.”

Anyone who has ever had to raise capital knows how difficult it can be. My only advice is to go into any business venture with your eyes wide open. One thing that can help you do that is a good business plan — which is the final topic offered by Resnick.

9. Not having a business plan. While not every company needs a formal business plan, a start-up that requires significant capital to grow and more than a year to turn a profit should map out how much time and money it’s going to take to get to its destination. This means thinking through the key metrics that make your business tick and building a model to spin off three years of sales, profits and cash-flow projections. ‘I wasted 10 years [fooling around] thinking like an artist and not a business person,’ says Louis Piscione, president of Avanti Media Group, a New Jersey company that produces videos for corporate and private events. ‘I learned that you have to put some of your creative genius toward a business plan that forecasts and sets goals for growth and success.’ (See related article, “Are Business Plans a Waste of Time?”)

10. Over-thinking your business plan. While many entrepreneurs I’ve met engage in seat-of-the-pants decision-making and fail to do their homework, other entrepreneurs are afraid to pull the trigger until they’re 100% certain that their plan will succeed. One lawyer I worked with several years ago was so skittish about leaving his six-figure job to launch his business that he never met with a single bank or investor who might have funded his company. The truth is that a business plan is not a crystal ball that can predict the future. At a certain point, you have to close your eyes and take the leap of faith.”

I disagree with Resnick when she writes that “not every company needs a formal business plan.” I think anybody who is thinking about starting a business does need a formal business plan. Without such a plan, you may not consider all of the factors that could affect your business. If you don’t have experience writing a business plan, get help. I do agree with her, however, that a business plan, even a really good one, does not guarantee success. Nevertheless, going through the paces of putting a business plan together helps avoid blind spots that could jump out and bite you. Resnick concludes “Despite the many books and articles that have been written about entrepreneurship, it’s just not possible to start a company without making a few mistakes along the way. Just try to avoid making any mistake so large that your company can’t get back on its feet to fight another day.” In other words, be smart about what you set out to do. When confronted with a make or break situation, don’t be afraid to reach for advice. Being able to weigh alternatives in a rational way can help you make the right decision most of the time. The last thing you want to have happen is that your story becomes a chapter in the sequel They Blew It Too!