Ezra Hoch was thinking about opening his own business. He was a creative fellow and had a couple of ideas for a new venture. Ezra figured that with some hard work and mazal, he’d grow something substantial within a year or two; he had some savings to tide his family over in the meantime. His wife was a bit skeptical, however, pointing out that most new businesses don’t succeed and although their savings were helpful, they couldn’t afford to go without an income for very long.
Why do most businesses fail? Is jumping in the way to go?
Start-Up Stats Are Grim
Ezra’s wife is right to be hesitant. It’s well-known that indeed, most new businesses don’t survive very long, forget about becoming large, profitable enterprises. The Bureau of Labor Statistics shows that more than half are gone within five years: the vast majority of firms have no employees, and 96% have fewer than 10. And out of 17 million firms tracked by NAICS, 75% have less than $500,000 in revenue (not profits) and 88% have less than a million. The American dream may include owning a substantial business, but for most, that dream is not happening.
Insufficient Planning
There is a number of key reasons most new businesses fail to launch, beginning with a lack of real research and planning. The business environment today is super-competitive, and consumers can quickly compare quality and prices. Many eager entrepreneurs don’t know their own industries or numbers very well. Who are the target customers? Which gaps are there in the market? What are potential competitors doing right and wrong? What will it cost to produce the product or service? What are the profit margins? The answers to these and many other questions should be clear to anyone looking to succeed in a new venture.
Insufficient Talent
Even if the owner of a start-up knows exactly where it needs to go, they must still figure out who will do the work required. All businesses need talent and skills in multiple fields, and an established company will have dedicated workers (in-house or outsourced) to handle each function. A start-up almost never has that luxury, forcing the business owner to wear several hats, which is a very hard thing to do. A great lawyer, accountant, therapist, restauranteur, or product designer is often terrible at sales, managing, or other minutiae, and the business can collapse before they manage to hire skilled workers to fill in the gaps.
Insufficient Cash Flow
The issue of insufficient talent is tightly connected to the big one: not enough cash flow. Even large, profitable businesses can go under if there’s a mismatch between the timing of expenses and income. But in a start-up, which is starting from ground zero, cash-flow management is likely to be excruciating. Often, to keep expenses low, a business owner will try to do everything themselves, which leads to poor service, which leads to fewer customers, which leads to worse cash flow…and the death of the business.
Insufficient Nerves
By now, it should be quite apparent that opening a business is not something to take on lightly. Entrepreneurship is a high-energy, high-risk endeavor, and most find it to be extremely stressful. And that pressure is itself a reason for business failure. Many simply can’t handle the endless roller coaster of deciding, selling, hiring, financing, pivoting, and fixing. Some people open a business thinking it will be a fun side gig, but usually, it’s more like playing a full-contact sport—against multiple teams at once. The potential rewards of business ownership are vast, but so are the risks and costs.
Exceptions to the Rule Are Just That
Certainly, there are exceptions to the bleak descriptions I’ve offered here. Some businesses are simple enough and the owner talented enough to launch and become profitable quickly and easily. Many of those quick launchers are small side gigs. A tutor, for example, is technically running a business and may bring in good money with minimal hassle. But the data and my experience interacting with many business owners indicate that building a significant business is very challenging. And jumping into one without hefty cash reserves and realistic planning for how to overcome the odds is foolish.
Improving the Odds
Those who enter the business arena with a clear plan and realistic expectations for time horizons and financial resources to manage cash flow will improve their odds. It’s also quite helpful to have a strong desire to succeed, whether in business in general or in a particular industry. Passion alone won’t solve cash-flow problems or bring in sales, but it can provide the drive needed to persevere in the face of the myriad challenges that pop up.
Swapping One Boss for Many
On the other hand, those who open a business just because they don’t like having a boss or are jealous of their boss’s income are likely to be disappointed. Instead of having one boss, a business owner has many—all the customers! Add disgruntled employees, unresponsive vendors, inquisitive government regulators, and empty accounts to the mix, and many stressed entrepreneurs recall the tranquil life they enjoyed in the olden days, drawing a steady paycheck while working for a sweet, kindly boss. (Grass is greener…..)
Keeping the Main Partnership Healthy
I’m a huge fan of entrepreneurship, but I know it’s not for everybody. Cheerleading the unprepared along a path to failure, as many business “gurus” do, is self-serving cruelty. But one thing that’s an obvious and absolute must for business success is having a supportive spouse. The pressures of building a business will be borne by a spouse, directly and indirectly, and it’s unwise and foolhardy to drag them along reluctantly. Destroying shalom bayis in the pursuit of financial dreams is perhaps the worst idea of all time.
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