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Avoid These Common Startup Mistakes

Lee Polevoi by Lee Polevoi on August 9, 2012
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Few things are more exciting for budding entrepreneurs than coming up with a great idea for a new business. After all, “great idea” equals “instant profit,” right? Not necessarily. If launching a company were that simple, there wouldn’t be so many failed startups.

A 2011 survey of more than 500 small-business executives identified these four missteps as the biggest mistakes entrepreneurs make when setting up a business:

  • Underestimating monthly expenses (32 percent);
  • Hiring the wrong people (20 percent);
  • Not knowing how to market and sell your product (18 percent); and
  • Not securing enough financing (18 percent).

Raising capital, too little or too much

Financing a startup is almost always a challenge. Most entrepreneurs understand the need to rent space, purchase equipment, stock inventory, and attract customers. In the early stages, however, it’s easy to overlook additional expenses, such as insurance, utilities, salaries, and other overhead costs. Your goal should be to secure sufficient capital to keep your fledgling operation afloat until revenue covers expenses and generates positive cash flow.

Albeit less common, the opposite situation — raising excessive capital — can result in assuming too many expenses at the outset (excess inventory, too many employees, etc.). In this scenario, you spend money on a fancy office and high-end product “identity packages,” which quickly drain the funds you need to actually get your business off the ground, not to mention potentially giving away too much of your own equity.

The Wall Street Journal’s Startup Calculator is a useful tool for getting a handle on expected startup costs.

Hiring the wrong people

Some people just starting out figure it’s more cost-effective to hire a few friends or family members, at least in the early stages. This is dangerous for several reasons: First off, they may lack the abilities needed to get the business going. Or, they may have certain skills you want, but they lack a temperament that’s compatible with your budding business culture. It’s also very difficult to fire a friend or family member.

The hiring process can take a long time and eat up precious resources. Get it right the first time.

Plunging in without a plan

If your idea is a game-changer, why get mired in the complexities of a business plan? Because startup success requires creativity and business skills. A plan makes you identify key metrics that will keep your new business going through the challenging early stages and into a model that thrives for years to come. Sales, profits, cash flow — all must come with goals and realistic forecasts in order for your enterprise to work.

By keeping you focused, a well-designed plan prevents you from spreading out in too many directions at once or thinking about future product refinements before the initial launch. It also forces you to hone in on your prospective target market. Do you know whether people will buy your product or service? If so, how many? How much are they willing to pay?

Going solo

Whether it’s a new product or service, chances are you’ll need help. The answer isn’t canvassing everyone you meet for advice, but rather selecting a handful of knowledgeable people to serve as your informal advisory board. Take advantage of other entrepreneurs’ willingness to share what they’ve learned, particularly how to avoid the mistakes they’ve made. You can find these people through your professional network or by attending trade shows and other events where startup gurus gather. Head online for additional advice and guidance.

“Making mistakes is part of the process of building a company,” notes Richard Branson, founder and chairman of the Virgin Group. “Quickly recovering from them is what’s important.”

Lee Polevoi

Lee Polevoi is an award-winning business writer specializing in the challenges and opportunities facing small business. He is former Senior Writer at Vistage International, a global membership organization of CEOs.

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