By Adam Wright, president, CEO and co-founder of Associated Graphics (AGI)
When should an entrepreneur cut their losses and walk away?
Opening a business is a risky venture. Entrepreneurs with brilliant ideas or large coffers of startup funding can still fail.
Just look at the numbers: According to the Small Business Administration’s Office of Advocacy, at least a third of new businesses shut down after two years. Half close up within five years. Two-thirds never reach the 10-year mark.
Every entrepreneur begins with the belief that their idea will launch a successful enterprise. You need that attitude to get started. But if things don’t go as planned, at what point does a new business owner need to acknowledge failure? When is it smarter to cut your losses and walk away?
My startup company has now been around for more than 20 years. As a mentor for other small businesses, I’ve learned a lot along the way about why some companies collapse and others rise. Here are three things to consider when deciding whether to persevere or close up:
1. Be honest with yourself when analyzing if there is a true need in the market for your idea.
New enterprises perform well if they’re offering a good or service that other people desire or need. Business ideas don’t have to be over-complicated to be successful.
In addition, it’s not always necessary to brainstorm an entirely original idea. Instead, focus on an industry you already understand. Then ask yourself, “What’s lacking in that industry? How can I fill that need?”
I have a saying about why my company survived those early years: We weren’t reinventing the wheel. We just built a better mousetrap.
I was already well-versed in the fleet graphic industry because of my early career as a race car driver. I saw a lot of major companies that were printing graphics, but none that put an emphasis on customer care. My business partner and I decided that would be our niche.
We succeeded because we found a way to differentiate ourselves from competitors. But it’s also because there is a strong need for vehicle graphics in the market. If that need didn’t exist, then it wouldn’t have mattered whether our customer service was good or not. We would have failed.
Data analysis company CB Insights has been surveying failed startups since 2018. They found that 35% of entrepreneurs said their companies closed because their business didn’t serve a market need.
If your startup is struggling to take off and earn revenue, go back to the drawing board. Analyze whether your idea solves a current need. If it doesn’t, that’s a red flag to move on.
2. Consider how you’re executing the business.
You may have the best idea out there. But are you selling it in the most optimal way? It’s possible, to say it simply, that you’re just doing it wrong.
I mean this in a couple of ways. One, did you thoroughly analyze who your target customer is before you launched?
If not, you may want to pause your operations and figure that out first. Your would-be clients need to know about you and the services you provide. It’s vital to identify that base in order to run successful marketing campaigns that’ll actually reach the intended audience.
Two, have you taken a good look at your leadership team? It’s important to have a diverse group of people, or a diverse partnership in place, in order to scale your operations.
For example, let’s say the founder dreamed up the idea for the company. But is the founder skilled at selling? Do they know anything about product development and how to set up supply chains?
This is where a solid partnership becomes crucial. That’s how my company started. My business partner was the industrial designer while I focused on executing sales. Without our complementing skill sets, we wouldn’t have gotten off the ground.
3. When it comes to money, determining your risk tolerance is personal.
The top reason why startups fail is due to lack of capital, according to the CB Insights survey. But as long as you’re still afloat, there’s no right or wrong answer when deciding how long to continue pushing your idea.
In my experience, I was more willing to take bigger risks with money when I started my company because I didn’t have children or a mortgage at the time. If I was launching the company now, I wouldn’t be comfortable taking the same kinds of risks because I have more to lose now.
According to Score, a network of business mentors, two-thirds of entrepreneurs rely on personal savings to start companies. About 27% use income from another job. The vast majority of startups, 78%, never receive outside funding in their first year of operations.
When it comes to risking money, people have different tolerance levels. You just have to decide your own limit.
This article was originally published in Forbes on October 14, 2021.