As an entrepreneur and founder of multiple companies, I’ve experienced the pleasure of success and the drama of failure. When I look back on the unsuccessful attempts, I can see the loopholes I missed and, in retrospect, can recognize why the opportunities failed.
4 Signs a Business Risk Is Too Risky
- It requires too much capital.
- You’re not sure of the market.
- The field is too competitive.
- You’re letting your ego make the decision.
It’s often said that failure is a better teacher than success, but that doesn’t mean we want failures. Here are a few points I’ve learned over the years that can help you minimize the failures on your entrepreneurial journey.
It Needs Too Much Money
First and foremost, for me, the economic viability and requirements of the new business are paramount to understanding the opportunity in front of you. Before you take the first step, you must have an understanding of the capital requirements, the time frame needed to achieve profitability, and the total economic return during the business life.
Dig deep and understand the cash requirements you will need to reach the break-even point. Lack of capital is the No. 1 cause of business failure. Don’t even consider starting a business until you truly know the capital needs of the business and know that you have the means to get there.
Knowing the capital requirements also means knowing the length of time it will take you to get to profitability. Is it six months? A year? Longer? While you may never know exactly the time frame, plan conservatively and have extra capital for the just-in-case moments.
It is also important to forecast an effective return. It does no good to spend a bunch of money on getting a business to profitability if you are never going to receive the expected, or necessary, return. So have enough capital, know your time frame and your expected profitability before ever opening the doors.
You’re Not Sure of the Market
Of additional importance is understanding your market and, specifically, the demographic of your customer base. Knowing who your customer is before you start the business lets you develop a strategic and effective marketing plan.
This also is critical in helping you determine the total capital needs as referenced above. Whether it’s print advertising, internet or social media, all cost money and need to be factored into your cash requirements. Understanding the financial viability of your customer base ensures that you have the right pricing for the right market.
There’s Too Much Competition
Knowing your competition is extremely important. Even if you’re not afraid of competition, you need to understand if the market you’re aiming for can handle another competitor. Unless you have created something new, you will face competitors and a fixed market base, so make sure there is room for one more provider.
The other thing to think about is how established your competitors are. If I’m in a really seasoned industry with only a few large competitors, I’m going to rethink my strategy and maybe take a pass. On the other hand, if there is a large market with a lot of competitors, taking a piece of the pie might be a little easier.
Your Ego Is Making the Decision
If I’m transparent about one final point in determining the viability of a venture, it’s simply to not let my ego get in the way of a smart decision. Yes, believing in yourself is important, but don’t let that affect your ability to see a clear picture of the new business opportunity.
I’ve always been a believer in trusting my gut, but I’ve also failed when I’ve been too confident and not seen all the potential signs of failure. Take your egotistical hat off and look at this opportunity with a clean and clear vision. Ask others, including your mentors, for their opinion. The more eyes, the better.
When evaluating business opportunities, it’s crucial to be energized and ready for the journey. However, it’s equally important to understand the potential downsides, plan for them and be prepared to step back if you can’t clearly see the end-game strategy. This focus on the end-game strategy will keep you goal oriented and ensure that you’re excited about the journey and prepared for the destination.
