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The vast majority of new business ideas do not turn into successful businesses. VCs and angel investors who back ambitious business ideas which need significant early stage funding are very cautious about who and what they will invest in because they have learned that even the most compelling pitch can soon turn to dust once the business gets going.
Even new businesses with modest ambitions – perhaps someone merely wanting to earn a living working for themselves - come to grief often enough for banks to be extremely wary about who they will lend to.
At one level the reason businesses fail is very simple- they run out of cash. This is true of all businesses from the largest to the smallest. It takes catastrophic economic conditions or serious strategic errors to bring a large business down in this way but for small businesses it’s very common and can even be the result of apparent success – too fast an expansion eats up available cash even if profits look healthy. You need more cash to continue than your backers are willing to provide . You are thinking it’s great but banks and investors just see the risks.
My advice to small businesses it to repeat to yourself a hundred times a day – CASH IS KING and watch the cash flow obsessively. New businesses always underestimate how much cash it will take to get established – in the early days think how much cash you are going to need over the next 6 months and then at least double it. If you can’t put your hands on that amount of cash easily – slow down!
In the early days if you worry about cash, profit will take care of itself - don’t worry about profit until cash is completely under control.
If you are going to go beyond survival and actually build a valuable new business you have to go beyond managing cash.
There’s a
magic success formula for all businesses of all shapes and sizes. After a lack of attention to cash flow a lack of attention to this success
formula is the root cause of most new business
failure or disappointment. Here it is:
In this article I’ll cover how to perform a quick check that your business has sufficient differentiation.
When you try and introduce a new product or a new service to the world you are competing with numerous existing businesses and numerous successful products and services which are already on the market.
To stand any chance of success your idea must turn into a set of products and services which represent some sort of breakthrough for people in achieving things that matter to them in their personal or business lives ie the idea must address currently unmet needs , both rational (ie what something does) and emotional (ie how something makes me feel or how something makes me look).
Ask yourself how is this idea different from what’s already available to people? What problems is it solving in a new and better way, what is it making possible that wasn’t possible before, what new and desirable experiences is it providing?
Ask yourself how many people this would appeal to and would the cost be worth it to them (remembering people measure cost in time, complexity and quality of experience as well as money).
Try it yourself - ask yourself those questions about the VCR when it was first introduced, Sky Plus, email, Satnav , Google, Facebook, Twitter, the iPod, the iPhone, and two of mine Telephone banking (Firstdirect) and Internet banking (egg).
I’ll think you will find you get very clear and compelling answers.
When I ask those questions on any business pitched to me however I rarely get clear and compelling answers. Those with the resilience and determination needed to be successful often come back to me later with a much better pitch – sometimes this pitch tells me the business has a chance , sometimes it becomes very clear to both of us they are wasting their time on this particular business and they should go and find another one. I tell them if you are going to fail it’s always good to fail as early as possible and as cheaply as possible.
If you read the story of most successful entrepreneurs you will find a lot of quick, cheap failure!
Mike Harris is the creator of three £1 billion organisations. He is the founder of Firstdirect and Egg. He was CEO of UK Telco Mercury Communications and is currently co-founder and Executive Chairman of Garlik, which won the prestigious BT Flagship Award for innovation in 2008. He is also a partner in the Difference Engine , a coaching mentoring and marketing consultancy designed to give organisations of all sizes access to building high performance environments.
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